Morgan Stanley (Morgan Stanley) chief equity strategist Mike Wilson said that the past period, small-cap and cyclical stocks outperformed, but such a super-strong rally may be nearing an end.
Wilson pointed out that since April last year, the Russell 2000 small-cap index outperformed the S&P 500 and Nasdaq 100 index by 50% and 40%, respectively.
Russell 2000 performance relative to the Nasdaq 100 (chart taken from Zero Hedge)
Wilson believes that the strongest phase of the small-cap rally may be over, so they downgraded small-cap stocks to “hold” to reduce risk. He said, “Right now, we think the period of outperformance, upward earnings revisions and valuation expansion is coming to an end.”
Small caps are stocks with total market capitalization between $250 million and $2 billion. They may be disproportionately impacted by increasing cost pressures during the economic recovery. Recent PMI surveys also reflect concerns about labor availability and supply chain shortages.
Wilson said small-cap stocks benefited the most last April based on the V-shaped recovery of the economy and government subsidies for unemployment. In contrast, large-cap stocks are more vulnerable to global trade, Exchange Rates and other external factors.
Wilson notes that small caps have rallied more with the deep recession rebound triggered by the new crown (CCP virus) outbreak, but may now begin to level off.
Comparison of recent small-cap performance (chart taken from Zero Hedge)
He believes that market-based interest rates have risen sharply since the beginning of the year and that investors are pricing in the prospect of a rapid economic rebound, which could mean a valuation adjustment for stocks going forward. That doesn’t mean small caps won’t continue to perform, but the risk reward at this point, may disappoint investors.
Since 2021, the Russell 2000 small-cap index has risen nearly 20%, while the S&P 500 is up 5.7%. But U.S. stocks Tuesday (16) early trading, the Russell 2000 index fell more than 1%, the Nasdaq 100 index rose more than 1%
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