What To Expect From e.l.f. Beauty’s (ELF) Q4 Earnings

By Jack Hough

Tesla Optimus robots will be the best surgeons on Earth by decade's end, Elon Musk recently predicted. Walmart is partnering with Alphabet to expand aerial drone delivery to 40 million customers next year, up from two million. And Walt Disney is retheming its Rock 'n' Roller Coaster at Hollywood Studios to feature The Muppets. OK, maybe scratch that last one, but cases abound of big companies pursuing stunning innovations. So, why have small-cap stocks been outperforming since mid-November? Is it just a blip, or the start of a long-awaited resurgence?

It's more than a blip, and the reasons go beyond "small-caps are due" or "they're cheap" or "this feels so wrong that maybe it's right." For example, a yearslong earnings recession for small companies appears to have lifted. Whether their stock rally endures could depend on manufacturing and the bond market. But let's start with due and cheap.

Small-caps have historically soared and slumped over stretches lasting close to a decade, on average. There was an epic rally from the mid-1970s to the early 1980s. A landmark research paper published in 1981 documented what became known as the small-company effect — the long-term tendency of these stocks to outperform. But soon after, small-caps entered a funk that would last until the popping of the dot-com stock bubble in 2000. Then they outperformed for nearly a decade.

The current underperformance streak is a historically long one. A 15-year investor in the S&P 500 index of large companies has made 608%, but the S&P SmallCap 600 has returned only 353% over that period, and the Russell 2000, another popular small-cap index, 303%. So, maybe small-caps are due — although being due is a concept that means a lot for pregnancy but nothing at all for roulette tables, and if I had to pick which one a bet on small-caps more resembles, it wouldn't be pregnancy.

On to cheap, then. The S&P SmallCap 600 trades at 18 times 2025 earnings, a smidgen above average, but the S&P 500 goes for 25 times earnings, which is expensive. So, small-caps trade at a relative discount, but it depends on which index you use. The Russell 2000 is 41 times 2025 earnings. The difference between the two indexes is that the 600 requires that constituent companies be profitable, and the 2000 doesn't, which means it's packed with hot and messy companies, and I mean that lovingly, because sometimes investors are into that. Since the beginning of November, the Hot & Messy 2000 has returned 9.2%, versus 7.6% for the Small But Serious 600 and 3.9% for the Big & Pricey 500.

Abysmal earnings have held back small-caps in recent years. Since the late-2022 introduction of ChatGPT to the public, large-company earnings have marched higher each year, by a cumulative 27%, fueled by frantic spending on artificial intelligence. But small-company earnings over that period fell 12% and recovered, for a cumulative rise of just 1%. Compared with large companies, small ones tend to be more sensitive to domestic manufacturing, which has shrunk for years, and to higher tariff costs.

Small-company earnings are picking up, however. This year, the S&P 500 and the SmallCap 600 are both expected to see 15% earnings growth. For the Russell 2000, whose earnings are more volatile and are still climbing back from recession, this year's growth is pegged at 66%.

Jill Carey Hall, who oversees small-cap stock strategy for BofA Securities, expects small companies to benefit from interest-rate cuts and a trickling down of capital spending by big companies. Her research shows that in years when small-cap earnings exceed large-cap earnings and accelerate, as she expects this year, small-caps have outperformed 75% of the time by an average of nine percentage points a year. Over longer periods, valuations matter most. If the past link between price/earnings ratios and subsequent stock performance holds, small-caps could return 9% annually over the next decade, versus 1% for large-caps.

There are exchange-traded funds for adding small-cap exposure with low fees, like Vanguard S&P Small-Cap 600, or, given BofA's current preference for value, iShares S&P Small-Cap Value. The firm recently published its top small-cap picks for 2026. Names include Alaska Air Group, Duolingo, elf Beauty, Knight-Swift Transportation, and Southwest Gas Holdings.

The main risk to a small-cap rally is a further downturn in manufacturing. Shares have tended to move with the Institute for Supply Management's PMI Manufacturing index, which tracks data from purchasing executives. That, in turn, has tended to respond to changes in 10-year Treasury yields. As for those, well, let's quickly change topics. Sort of.

The Trump administration recently announced a big purchase of mortgage securities. The goal: to bring mortgage rates down to provide quick help with home affordability ahead of midterm elections, says Jonathan Hill, head of inflation research strategy at Barclays. But spreads between mortgages and Treasuries are squeezed, so what's really needed are lower 10-year Treasury yields. Short-term rate cuts aren't helping much there. Bond buyers have turned grumpy over endless deficits, and what looks like a politically motivated criminal investigation of the Federal Reserve chair.

But the administration isn't powerless. Hill outlines three examples. The first is tweaking bank capital requirements in ways that promote large Treasury purchases. The second is the Treasury issuing bills to fund a buyback of longer issues, which is directionally similar to the Fed's Operation Twist in 2011 and 2012. Third, Treasury could simply cut supply by issuing fewer bonds and more bills.

"This is clearly a very creative administration that comes up with a lot of ideas and pushes them through where people aren't necessarily expecting," he says. He'll be watching President Donald Trump's speech in Davos, Switzerland, later this month for clues on what those creative ideas mean for bonds.

Write to Jack Hough at jack.hough@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

E.l.f. Beauty looks best-positioned to benefit from increased spending on beauty in 2026, Jefferies analysts say in a note. The company has historically been able to quickly bring trends in prestige beauty to the mass market with its nimble supply chain, setting it up to win as the industry enters a makeup cycle, the analysts say. The company's guidance also looks conservative, setting up for upside to estimates, and potential tariff relief could also pose a meaningful tailwind, given its China-focused supply chain, the analysts say.(kelly.cloonan@wsj.com)

(12:52 GMT) elf Beauty Price Target Cut to $85.00/Share From $100.00 by Piper Sandler

(16:59 GMT) elf Beauty Price Target Cut to $103.00/Share From $137.00 by JP Morgan