Small-cap stocks have attracted more investors and analysts attention this week with their benchmark index the Russell 2000 jumping 3.5% on Tuesday to 1799 points, its biggest one day percentage gain since January 2021.
However, while the large-cap S&P 500 index
SPX,
has fallen 17% from its January all-time high, the small-cap Russell 2000
RUT,
has also dropped 19% from its own record last November.
According to strategists at RBC Capital Markets, it is time for investors who allocate across the market capitalization spectrum to overweight on small caps as the index, which peaked before the broader market did, might be poised to hit the bottom earlier too.
“Historically, recessions have tended to be good buying opportunities for Small Caps,” said Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets, in a client note on Friday. “They tend to underperform while stocks are falling heading into or early on in a recession, and then tend to lead once the broader US equity market has bottomed mid way through the recession. Importantly, much of our work on Small Caps speaks to the idea that they’ve come very close to pricing in recession already.”
Read more: Small-caps lead stock-market surge as Russell 2000 sees biggest gain since January 2021
The rate of U.S. consumer price inflation continued to rise in June, reaching 9.1% year-over-year. The four-decade high in inflation, combined with rising interest rates, have flashed warning signs of a potential recession to the stock market.
RBC Capital pulled down their S&P 500 index price target for year-end to 4,200, trimming it for the second time this year from June’s 4,700 points.
“If the US economy is headed for the economic scenario that’s currently embedded in consensus forecasts, or a relatively short and shallow recession that begins in 2H22 and wraps up in early 2023, we think it’s possible that the S&P 500 has already bottomed, and if it hasn’t, will find a bottom during the 3rd quarter,” said Calvasina.
Read more: What big Wall Street banks say about where the S&P 500 will end 2022
Small caps performance over the past year has been consistent with an economy that’s in recession, as the Russell 2000 forward price-earnings ratio has been trading in the 11-13 times range recently. According to Calvasina, that tends to mark its bottom.
The S&P 600
SML,
another small-cap index, is trading at 14 times earnings, according to FactSet data. The large-cap benchmark, S&P 500, has a current price-earnings ratio of 18 times trailing earnings.
“When we look at Small Caps performance in the context of GDP trends and expectations, trends in ISM manufacturing, and jobless claims, it also appears to us that Small Caps are baking in a lot of economic pain already,” Calvasina said. “Additionally, we’ve also seen a clear shift in earnings revisions trends for Small Caps, which are currently holding up much better than those in Large Cap – likely because Small Caps earnings revisions turned negative earlier.”
Russell 2000 index was down 32.9 points, or 1.8%, to 1,803.75 on Friday afternoon. Dow Jones Industrial Average
DJIA,
lost 211.7 points, while Nasdaq Composite
COMP,
shed 266.9 points after Snap. Inc
SNAP,
reported disappointing earnings on Thursday. The S&P 500 was down 1.3%.
Source: https://www.marketwatch.com/story/its-time-to-overweight-small-caps-as-theyve-come-very-close-to-pricing-in-recession-rbc-capital-11658515532?siteid=yhoof2&yptr=yahoo