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Inside Small-Cap's 3-Year Best Surge in Popularity: ETFs in Focus
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Small caps have been the center of attraction on Wall Street for the past two months. Bank of America's latest fund managers’ survey revealed a significant increase in investor interest in small caps, reaching a peak not seen in nearly three years, as quoted on Yahoo Finance.
Small-cap ETFs like ALPS Medical Breakthroughs ETF (SBIO - Free Report) (up 14.5% past month), AlphaMark Actively Managed Small Cap ETF (SMCP - Free Report) (up 5.2%), Pacer US Small Cap Cash Cows Growth Leaders ETF (CAFG)(up 5.2% past month), Motley Fool Small-Cap Growth ETF (TMFS - Free Report) (up 4.7% past month), Invesco S&P SmallCap Momentum ETF (XSMO - Free Report) (up 4.4% past month) and Principal U.S. Small-Cap ETF (PSC - Free Report) (up 4.3% past month) have gained in the range of 4% to 14% past month in comparison to the S&P 500-based ETF SPY’s 0.6% uptick.
Shift in Investor Preference
The survey, conducted early January, indicates a change in investors’ outlook, with expectations of small-cap companies outperforming large-cap ones over the next 12 months. This is a first since June 2021. Wall Street strategists find small caps increasingly attractive, especially with the likelihood of lower interest rates this year.
Market Insights and Predictions
In December, Tom Lee from Fundstrat predicted a significant rise in small caps and financials stocks. He emphasized the untapped potential in these areas, noting that they hadn't yet fully participated in the market rally like the tech mega-caps. Lee indicated that small caps, which have more short-term debt than other companies, could benefit from the cost of capital coming down as the Fed is expected to cut rates in 2024. So, a catch-up rally for small-caps is in the cards.
Recent Market Trends
Small caps have seen a substantial surge lately, driven by a 'soft-landing' scenario and anticipated interest rate cuts totaling about 75 basis points in 2024. The Russell 2000 Index, in particular, witnessed its fastest turnaround ever from a 52-week low to a 52-week high.
Despite this rapid growth, Goldman Sachs remains optimistic, predicting around a 15% return for the Russell 2000 over the next 12 months. This projection is based on current valuations and a positive economic outlook, as quoted on the above-mentioned source.
M&A Activities to Pick Up In Small-Cap Space?
The valuation gap between large and small-cap companies, as well as private and public markets, suggests that mergers and acquisitions (M&A) activity may pick up. Companies may find it more attractive to acquire smaller, faster-growing firms, taking advantage of the valuation discrepancy.
Still-High Greenback Not a Problem for Small-Caps
With small-cap companies being more inclined to the domestic economy and having less foreign exposure, a stronger U.S. dollar is beneficial for the segment. Although we expect the Fed to cut rates in the second half of 2024, the U.S. dollar strength won’t come down suddenly. It would take some time to cool off and thus will support a long-overdue small-cap rally in the near term.
Any Caveat?
Lori Calvasina at RBC Capital Markets, while generally recommending small-cap stocks, expresses concerns over their recent popularity. She noted that a shift from small caps being oversold to becoming widely favored, raising questions about their future performance, as quoted on Yahoo Finance.
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Inside Small-Cap's 3-Year Best Surge in Popularity: ETFs in Focus
Small caps have been the center of attraction on Wall Street for the past two months. Bank of America's latest fund managers’ survey revealed a significant increase in investor interest in small caps, reaching a peak not seen in nearly three years, as quoted on Yahoo Finance.
Small-cap ETFs like ALPS Medical Breakthroughs ETF (SBIO - Free Report) (up 14.5% past month), AlphaMark Actively Managed Small Cap ETF (SMCP - Free Report) (up 5.2%), Pacer US Small Cap Cash Cows Growth Leaders ETF (CAFG)(up 5.2% past month), Motley Fool Small-Cap Growth ETF (TMFS - Free Report) (up 4.7% past month), Invesco S&P SmallCap Momentum ETF (XSMO - Free Report) (up 4.4% past month) and Principal U.S. Small-Cap ETF (PSC - Free Report) (up 4.3% past month) have gained in the range of 4% to 14% past month in comparison to the S&P 500-based ETF SPY’s 0.6% uptick.
Shift in Investor Preference
The survey, conducted early January, indicates a change in investors’ outlook, with expectations of small-cap companies outperforming large-cap ones over the next 12 months. This is a first since June 2021. Wall Street strategists find small caps increasingly attractive, especially with the likelihood of lower interest rates this year.
Market Insights and Predictions
In December, Tom Lee from Fundstrat predicted a significant rise in small caps and financials stocks. He emphasized the untapped potential in these areas, noting that they hadn't yet fully participated in the market rally like the tech mega-caps. Lee indicated that small caps, which have more short-term debt than other companies, could benefit from the cost of capital coming down as the Fed is expected to cut rates in 2024. So, a catch-up rally for small-caps is in the cards.
Recent Market Trends
Small caps have seen a substantial surge lately, driven by a 'soft-landing' scenario and anticipated interest rate cuts totaling about 75 basis points in 2024. The Russell 2000 Index, in particular, witnessed its fastest turnaround ever from a 52-week low to a 52-week high.
Despite this rapid growth, Goldman Sachs remains optimistic, predicting around a 15% return for the Russell 2000 over the next 12 months. This projection is based on current valuations and a positive economic outlook, as quoted on the above-mentioned source.
M&A Activities to Pick Up In Small-Cap Space?
The valuation gap between large and small-cap companies, as well as private and public markets, suggests that mergers and acquisitions (M&A) activity may pick up. Companies may find it more attractive to acquire smaller, faster-growing firms, taking advantage of the valuation discrepancy.
Still-High Greenback Not a Problem for Small-Caps
With small-cap companies being more inclined to the domestic economy and having less foreign exposure, a stronger U.S. dollar is beneficial for the segment. Although we expect the Fed to cut rates in the second half of 2024, the U.S. dollar strength won’t come down suddenly. It would take some time to cool off and thus will support a long-overdue small-cap rally in the near term.
Any Caveat?
Lori Calvasina at RBC Capital Markets, while generally recommending small-cap stocks, expresses concerns over their recent popularity. She noted that a shift from small caps being oversold to becoming widely favored, raising questions about their future performance, as quoted on Yahoo Finance.