Raine WarrenAccording to Tom Lee, an equity bull and head of research at Fundstrat Global Advisors, small-cap stocks may still shine throughout this year despite a rocky start in 2024.
Lee predicts that the S&P 500, a large-cap benchmark, will rally to 5,200 points by the end of the year, a more than 7% increase from its current level. Additionally, he expects the Russell 2000, a small-cap equity gauge, to reach as high as 3,000 points by the end of this year, a remarkable 50% above its current level.
Small-cap stocks faced many challenges in 2023 due to rising interest rates and the looming threat of a recession. However, they experienced a boost in the fourth quarter as optimism grew surrounding potential interest rate cuts by the Federal Reserve.
Unfortunately, these expectations have been dampened by positive economic data and hawkish comments from Fed officials since the beginning of the new year. Consequently, traders have revised their expectations for when rate cuts may occur.
As of now, the Russell 2000 has fallen 2.8% in 2024, while the S&P 500 has seen a modest 1.7% increase during the same period, based on FactSet data.
Nonetheless, Fundstrat's Lee believes that small-cap stocks still hold significant potential for a rally this year and considers them his top sector for 2024.
Lee points out that the price-to-book ratio of companies within the Russell 2000 is only 44% of that of the S&P 500, indicating that small-cap stocks are currently at a substantial discount.
Despite the challenges faced early on, small-cap stocks continue to be an attractive investment opportunity with considerable room for growth.
Small-Cap Stocks Expected to Outperform in 2024
Introduction
In recent years, small-cap stocks have faced some challenges in the market. However, experts are optimistic about their performance in 2024. According to industry analysts, small-cap stocks have the potential to outperform their large-cap counterparts, driven by various factors such as market trends and economic conditions.
Positive Outlook for Inflows
Although small-cap stocks are currently experiencing investor outflows, there is a belief that this trend will change in 2024. Analysts predict a positive shift in inflows throughout the year, which would have a positive impact on prices. This renewed investor interest can potentially drive growth for small-cap stocks.
The Impact of Interest Rate Cuts
Another significant factor to consider is the influence of interest rate cuts by the Federal Reserve. As interest rates decrease, investors may choose to withdraw funds from money markets, where returns are currently around 5%. These funds could then be redirected towards alternative assets such as stocks, including small-cap stocks. This reallocation of capital can potentially contribute to the overall growth of the small-cap segment.
Support from BofA Global Research
Jill Carey Hall and Nicolas Woods, strategists at BofA Global Research, share a positive outlook for small-cap stocks. They believe that the small-cap leadership observed in the market during the fourth quarter is indicative of sustained performance. Hall and Woods anticipate that 2024 will mark a turning point, with small-cap stocks surpassing their large-cap counterparts for the first time since 2016.
Historical Performance and Election Years
Historically, small-cap stocks have demonstrated resilience and tend to deliver higher returns compared to their large-cap counterparts following periods of market narrowness. In 2023, the stock market saw a record-breaking year for poor breadth, heavily influenced by a few dominant tech stocks. Based on historical data, analysts suggest that small-cap stocks tend to shine in election years, indicating the potential for double-digit returns in 2024.
Market Performance
On Tuesday, the Dow Jones Industrial Average (DJIA) experienced a decline after previously reaching an all-time high on Monday. However, the S&P 500 and the Russell 2000 both witnessed gains, according to FactSet data.
Despite short-term fluctuations, the overall outlook for small-cap stocks remains positive, with experts anticipating a favorable performance in 2024. As investors reassess their portfolios and market conditions shift, small-cap stocks have the potential to deliver attractive returns and outperform their larger counterparts.
Leave A Reply
Your email address will not be published. Required fields are marked *