Still cautious on small caps over the near term - BofA
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STILL CAUTIOUS ON SMALL CAPS OVER THE NEAR TERM - BOFA
U.S. stock indexes are higher across the board on Thursday, a day after the Federal Reserve kicked off a new easing cycle by cutting interest rates by 50 basis points, but BofA Securities strategists say they are still cautious on small cap companies and favor mid-caps for the near term.
The small-cap Russell 2000 .RUT is last up just over 2% on the day, while the small-cap S&P 600 .SPCY is up 1.9% and the mid-cap S&P 400 .IDX is up 1.8%. The benchmark S&P 500 .SPX is up 1.9%.
While rate cuts are positive for small-cap companies in general because they mean lower borrowing costs for small businesses, improvement in fundamentals for the group may be needed for it to take market leadership, BofA strategists wrote.
"More cuts are an incremental positive for small caps given their rate sensitivity/refinancing risk... and bigger cuts help stem growth concerns," they wrote.
"But we still believe that improvement in small cap fundamentals is necessary for sustained small cap leadership to resume," they added, noting that "small cap earnings are still in a recession... sales have disappointed and guidance remains below consensus."
As such, BofA remains "tactically cautious" on small caps and likes mid-caps for the near term.
"While mid caps are still relatively expensive vs. small on valuation..., we would favor mid caps for the near-term. Mid caps have seen better recent guidance and revision trends, have outperformed small caps on avg. in Downturn regimes..., and have outperformed both large and small caps in the 6-12 months after the initial Fed cut more than half of the time," they wrote.
(Caroline Valetkevitch)
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