📖 Your Q2 Earnings Guide: Discover the Stocks ProPicks AI Highlights to Jump Post-EarningsRead more

RBC: Too early to turn bullish on US small caps

Published 06/17/2024, 08:53 AM
© Reuters

RBC Capital analysts advised caution regarding US small-cap stocks, despite their recent underperformance.

In a note, the investment bank highlights several factors that make the outlook for small caps less promising in the near term.

"The continued outperformance of mega-cap growth stocks has been logical but still somewhat jarring to us," the bank acknowledges. This trend coincides with a decline in Treasury yields, which historically benefited small caps. However, RBC Capital suggests a decoupling is underway.

They attribute the outsized performance of large-cap growth stocks to a combination of factors.

First, slowing GDP forecasts create a more favorable environment for large-cap and growth-oriented companies compared to small-cap and value stocks. Second, recent earnings revisions have been more positive for large caps. Finally, reduced crowding in the large-cap growth sector makes it more attractive.

While acknowledging the recent weakness in small caps, RBC Capital remains neutral on the sector relative to large caps. They recognize the historically favorable positioning of small caps based on investor sentiment and valuation metrics.

However, they caution that these factors are outweighed by the lack of fundamental tailwinds and negative earnings revision trends for small caps.

The report emphasizes a wait-and-see approach. "We see enough that looks interesting to stay neutral for now and think that when it's finally time to put on Fed rate cut trades this space will do well," RBC Capital concludes.

However, they recommend holding off on an overweight position in small caps until the Federal Reserve rate cuts are imminent and economic conditions improve.

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.