Analysts at Bank of America said Thursday that small-cap stocks are still very cheap compared to large-cap stocks, with there being "pockets of SMID not to be ignored."
The bank noted that multiples expanded across the board last month, led by mid-caps, putting the Russell 2000 P/E above its average of 15.2x for the first time since 2021.
"Small caps remain the least expensive size segment, and the relative P/E of small vs. large (0.75x vs. long-term avg. of 1.0x) argues for small cap outperformance over the next decade (Exhibit 30): multiples imply 9% annualized returns for the Russell 2000 vs 2% per annum for the Russell 1000," wrote the bank.
"Don't ignore attractive pockets of small despite NT risks," added BofA. "Following the April inflation data and our economists' push-out of the first Fed cut until Dec., we took a more cautious near-term stance on the Russell amid the uncertainty overhang to multiples and refinancing risks
to earnings (~45% of debt is short-term or floating rate)."
However, given the macro case for small caps hasn't changed, the bank still sees pockets of small caps as well-positioned to lead large caps today.
"Energy, Materials and Industrials are three historically cheap sectors vs. large peers that benefit from these themes (Energy is also a geopolitical risk hedge) and have among the lowest refi risk within small caps."