Small-Caps Get Cheaper Despite Market Rally: Bank of America Analysts
Bank of America analysts revealed that small-cap stocks became more affordable in January, despite the overall market rally. According to a memo from the firm, small-caps are priced for conditioned credit deterioration and no manufacturing recovery.
The analysts pointed out in a recent memo that the sell-off in January caused SMID-cap multiples to contract. The forward price-to-earnings (P/E) ratio for small-caps fell from 14.7x to 14.3x, while the Russell MidCap P/E dropped from 17.2x to 17.0x. However, the Russell 1000 forward P/E expanded from 19.7x to 19.9x.
In comparison to large-caps, small-caps are currently trading at a relative P/E of 0.72x, which is 28% below the historical average, as reported by Bank of America. The firm emphasized that small-caps are historically cheap and highlighted that valuations suggest 10% annualized returns over the next decade for the Russell 2000, versus 3% for the Russell 1000.
Bank of America expressed confidence in sticking with value within small and mid-caps for 2024. The analysts believe that this sector offers more high-quality stocks and fewer non-earners. They also stated that small and mid-cap stocks historically outperform when profits growth inflects, and when the Federal Reserve finishes raising interest rates.
Overall, despite the market rally in January, small-cap stocks have become more affordable, allowing potential investors to take advantage of historically cheap valuations. With the expectation of higher returns and a positive outlook for the small and mid-cap sector, Bank of America analysts remain confident in their recommendation to invest in this space for the long term.
Analyst comment
Positive news. The small-cap market is expected to perform well with 10% annualized returns over the next decade, compared to 3% for large-caps. Bank of America analysts recommend investing in small and mid-cap stocks for the long term due to historically cheap valuations and potential for higher returns as profits grow and interest rates stabilize.
