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Credit for the headline goes to Bank of America’s small-caps analyst Jill Carey Hall, whose latest report on the segment is pretty bearish for someone who covers it.
As Unhedged’s Rob Armstrong and Aidan Reiter wrote overnight, the small-caps renaissance that we excitedly covered earlier this summer has already fizzled out (the photo choice then of ill-fated Stringer Bell wasn’t a coincidence, however).
In fact, the S&P 500 has outperformed the sinking Russell 2000 small-caps index by almost 5 percentage points since our first post in July on the small-caps bounce (sorry).
Carey Hall argues that cheap valuations still mean that small-cap stocks look like a better bet than large-caps over the next decade. Noting that valuations are more predictive in the long run, she estimates that the Russell 2000 (caveats!) should return 9 per cent annually over the next decade, compared to the Russell 1000’s 2 per cent per annum return.
Of course, doing the valuations/returns maths over any time of the past decade would probably show something similar. And as FTAV wrote in a big post earlier this year, there are a lot of good reasons why you shouldn’t extrapolate from the past when it comes to the future performance of small-caps.
Moreover, Carey Hall is remarkably downbeat on the immediate outlook, noting that earnings are falling and smaller companies themselves are pessimistic (not a great sign for the economy either):
While small cap (S&P 600) 2Q earnings beat expectations, earnings still declined 10% YoY, sales missed expectations and 2H estimates continued to fall. Small caps are still guiding below consensus (more so than historically), while large caps are guiding above consensus (with an above-avg. guidance ratio).
Coupled with recent macro data (softer-than-expected ISM, disappointing jobs data, a shift to “Downturn” in our US Regime Indicator) plus a seasonally weak period for small caps and potential for further volatility ahead of the US election, we continue to prefer large>small caps near-term.
On the other hand, maybe a small-caps analyst sounding this glum is a sign of something?
Further reading:
— Small stocks, big problems (FTAV)