Small-cap stocks have been all the rage on Wall Street over the past two months.
In fact, according to Bank of America's latest fund manager survey, investors haven't been this bullish on small-cap stocks in about three years.
investigation The survey, conducted from January 5 to 11, found that investors expect large-cap stocks to underperform small-cap stocks over the next 12 months for the first time since June 2021.
With inflation falling faster than most expected, investors are pricing in about six interest rate cuts in 2024, and small-cap stocks are gaining in a bull market that has spurred a soft landing. From late October to mid-December, the Russell 2000 Index took just 48 days to rise from a 52-week low to a 52-week high, the fastest rise in the index's history, according to Bespoke Investment Group. Recovery was recorded.
The index is now up more than 16% from its October lows, and the key question for investors is whether the index has already factored in the benefits of future lower interest rates, limiting the upside for small-cap stocks. Please.
Goldman Sachs says no.
“Combining the current low valuations with a healthy economic outlook, the Russell 2000 should return approximately 15% over the next 12 months,” Goldman Sachs' equity strategy team led by David Kostin wrote on January 12. wrote in a note to customers.
An important caveat to this call may be if “investor expectations for economic growth deteriorate.”
RBC Capital Markets' Lori Calvasina has been recommending small-cap stocks for months. Many of Calvasina's arguments about why small-cap stocks can outperform remain intact. In other words, small-cap stocks have outperformed during previous interest rate cuts, and their exposure to rising rates hasn't been as bad as feared. But a key part of Mr. Calvasina's argument that small-cap stocks are oversold has been upended in the recent market rally.
For this reason, Calvasina is “concerned” about how widespread the call for small-cap stocks to go up is becoming.
“Everyone we met with in December (including a variety of investors who aren't focused on small-cap investing) wanted to talk about small-cap stocks, and it felt like it was constructive,” Carbasina said. I wrote this in a memo on January 8th.
She added: “I can't remember the last time something like this happened.”