Small stocks have been the craze on Wall Street over the past couple of months.
In fact, according to the latest survey of fund managers by Bank of America, investors haven’t been this bullish on small stocks in nearly three years.
Scanning A study conducted from January 5 to 11 revealed that investors believe that large-cap companies will underperform small-cap companies in the next 12 months for the first time since June 2021.
Small stocks rose amid the soft rally fueled, which has seen investors price in nearly a half-dozen interest rate cuts in 2024 as inflation declines faster than many expected. From late October to mid-December, it took just 48 days for the Russell 2000 to rise from a 52-week low to a new 52-week high, marking the index’s fastest turnaround ever, according to Bespoke Investment Group.
Now, with the index up more than 16% since its October lows, the key question for investors is whether the index has already priced in the future benefits of lower interest rates, capping the upside in buying small stocks.
Goldman Sachs says no.
“The combination of current low valuations and a healthy economic outlook means the Russell 2000 should return about 15% in the next 12 months,” Goldman Sachs’ equity strategy team led by David Kostin wrote in a note to clients on January 12.
The main caveat to this call may be “deteriorating investors’ expectations for economic growth.”
Lori Calvasina of RBC Capital Markets has been recommending penny stocks for months. Much of Calvasina’s argument for why small companies outperform remains intact. This means that small-cap stocks have outperformed in previous interest rate cuts – and their exposure to higher interest rates has not been as bad as feared. But a key part of Calvasina’s call, that penny stocks were oversold, has flipped amid the recent market rally.
This made Calvasina “concerned” about how popular the call for more small-cap stocks would be.
“In December, it seemed as if everyone we met (including many investor types who are not focused on small-cap investing) wanted to talk about small companies and were constructive,” Calvasina wrote in a January 8 note. on her”.
“We can’t remember the last time this happened,” she added.