Lexicon Financial Group Weekly Update — February 26, 2025
“If you really look closely, most overnight successes took a long time.” ”
From the desk of Craig Swistun, CIM, MFA-P, Portfolio Manager, Raymond James Investment Counsel, and Wayne Hendry, Client Relationship Manager, Raymond James Investment Counsel
Looking Around
Does the size of a business matter?
Sometimes, but now, always. The financial industry tends to sort companies by their size – often called their “market capitalization.” Basically, it’s the total value of all of the shares of a business. So, if a company has 100 shares outstanding and each share is worth $10, its market capitalization would be 100 x $10 = $1000.
In the U.S., for example, a “large cap” company would be one that is worth over US$10 billion. A small-cap company, by comparison, would be one worth somewhere between US$250 million and US$2 billion.
Larger companies certainly have some advantages. Their size often provides easier access to funding, higher brand recognition, and an established position in the market with support of existing customers.
There are disadvantages, though. They may have formalized and stiff corporate culture, difficulties with cost control and localizing (large businesses may not be willing to locate to remote areas where there are a smaller number of customers), and poor flexibility and slower ability to change. (1)
Are smaller businesses better? Sometimes. They can be disruptors and innovators -- especially where large companies are not serving customers effectively. Their size may provide more flexibility, allowing them to adapt quicker to changing market conditions. (2)
Smaller businesses do have disadvantages as well. Selling bonds or issuing new stock to raise capital is more difficult. They also do not benefit from economies of scale that large companies might have, may not have the institutional purchasing power of a large company, and may have little to no brand or name recognition. (3)
However, every large business has to grow from something smaller. Take Nvidia, for example. The idea for the business came to the founders while eating at a Denny’s restaurant in San Jose, California, in 1993. Today, albeit more than 20 years later, it is the second largest company in the world with a market cap of over US$2 trillion. (4)
Although market cap isn’t necessarily a measure of revenue or profitability, it is a measure of investor belief coupled with capital market size. And looking at the graphic below, American companies are dwarfing other, successful companies, from other large economies. Why this is the case is a subject for another time. (5)
Investors like predictability. Large businesses provide a sense of stability and reliability for consumers. But economies also need innovation if they are going to build towards the future. New ideas, new insights.
One of the decisions that goes into portfolio construction is how much to invest in large-cap companies versus small-cap companies. This decision is impacted, too, by the current economic environment. Large-cap companies, generally, are less volatile than small-cap stocks, which means they attract capital in periods of economic uncertainty. (6)
Read and Watch
Want deeper insight into topics in your Weekly Update? Then, read and/or right click:
Canada, EU working on diversifying trade in face of U.S. threats
From Japan, a Hard Lesson About a Weak Currency
Looking Back
The S&P/TSX composite index (TSX) fell to a five-week low, last Friday, on declines for energy, metal mining and high-flying technology shares (e-commerce company Shopify Inc. shares were down nearly six per cent), as commodity prices declined and investors grew more risk averse. For the week, the TSX was down 1.3 per cent. (7)
Major stock markets in the United States (U.S.) fell last week. With markets closed Monday in observance of Presidents’ Day, stocks started the week on Tuesday generally trending up. However, sharp losses in the latter half of the week erased the early gains. Many of last week’s headlines centered around geopolitics and tariff news. President Donald Trump’s continued efforts to end the Russia-Ukraine conflict as well as his announcement to impose additional tariffs on automobiles, pharmaceuticals, and lumber products were in the spotlight again.
On Tuesday last week, the National Association of Home Builders reported that its housing market index—a gauge of the U.S. housing sector that measures home builders’ confidence—was 42 in February, down from 47 in January. This is the lowest level in five months. The report highlighted uncertainty around tariffs, elevated mortgage rates, and high housing costs as factors driving the overall decline in sentiment. Meanwhile, the University of Michigan reported that its Index of Consumer Sentiment for February dropped nearly 10 per cent month over month to 64.7. In fact, all components of the index fell in February, led by a 19 per cent plunge in buying conditions for durables, thanks to fears that tariff-induced price increases are imminent. On top of this, inflation expectations for this year jumped to 4.3 per cent, up a full one per cent from January.
The pan-European STOXX Europe 600 Index ended last week a feeble 0.26 per cent higher amid cautious optimism, as investors weighed U.S. trade policy developments and efforts to end the Russia-Ukraine conflict. Other major European stock markets ended the week mixed. However, business activity in the eurozone remained in expansionary mode for a second consecutive month in February. Output in Germany rose for a second consecutive month but France suffered a sharp output decline while the rest of the bloc posted a solid expansion in output.
In Japan, stock markets fell last week, as they struggled in an environment of yen strength and rising Japanese government bond yields. Stocks were further depressed by President Trump’s reiteration of tariff threats. The yen appreciated to around JPY 150.4 against the U.S. dollar, from about 152.3 at the end of the prior week, as a hot consumer inflation stoked some speculation that the Bank of Japan (BoJ) could be more aggressive than currently expected in raising interest rates.
Mainland Chinese stock markets rose last week due to strength in technology shares following better-than-expected earnings from some of the country’s leading tech companies. The surprisingly strong results from Alibaba and other Chinese tech companies came after local artificial intelligence startup DeepSeek displayed its technological capabilities in January. This renewed investor interest in the country’s internet sector. Sentiment was also buoyed after a high-profile meeting between President Xi Jinping and several Chinese tech entrepreneurs which potentially signaled that the government was adopting a more supportive stance toward private sector companies. However, a possible trade war with the U.S. has underscored the importance of the private sector as a growth engine for China as it continues to grapple with a persistent property slump and weak domestic demand. (8)
The opinions expressed are those of Craig Swistun and not necessarily those of Raymond James Investment Counsel which is a subsidiary of Raymond James Ltd. Statistics and factual data and other information presented are from sources believed to be reliable, but their accuracy cannot be guaranteed. It is furnished on the basis and understanding that Raymond James is to be under no liability whatsoever in respect thereof. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. Raymond James advisors are not tax advisors, and we recommend that clients seek independent advice from a professional advisor on tax-related matters.
Large Businesses – Evaluation, Jerry Grzegorzek, Super Business Manager, August 2, 2021
Why Small Businesses Matter To All Businesses, Peter Ross, Forbes, May 6, 2024
5 Ways Small Businesses Are at a Disadvantage, Investopedia Team, Investopedia, August 21, 2023
Nvidia briefly overtakes Apple as world’s most valuable company—it began in a breakfast booth at Denny’s, Ashton Jackson, CNBC, November 5, 2024
Ranked: 10 Largest Companies in the U.S., Europe, and China, Pallavi Rao, Visual Capitalist, February 24, 2025
Small-Cap Stocks vs. Large-Cap Stocks: What's the Difference?, Sean Ross, Investopedia, May 24, 2024
TSX posts biggest decline in two months as investors turn defensive , The Globe And Mail, February 21, 2025
Global markets weekly update – U.S. inflation accelerates in January, T. Rowe Price, February 21, 2025
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Looking to Learn?
If you want to know more about some of the topics we wrote about this week, just click on the links below:
Market Capitalization: What It Means for Investors
Economies of Scale: What Are They and How Are They Used?
Why everyone is suddenly talking about Nvidia, the nearly $3 trillion-dollar company fueling the AI revolution