Small-cap stocks in the U.S. are putting up “a fight,” showing “better trends” while lagging the S&P 500 and Nasdaq Composite this year, according to RBC Capital Markets.
The Russell 2000, an index tracking U.S. small-cap stocks, has seen modest gains of around 2.8% so far in 2023, while the S&P 500 has jumped 11.7% and the technology-heavy Nasdaq Composite has surged 26.8%, according to FactSet data based on Monday afternoon trading levels.
“Nasdaq valuations look stretched, but unlike the Tech bubble S&P 500 and Russell 2000 are well below recent peaks,” said Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets, in a research note Monday. RBC is overweight small-cap stocks relative to large-cap.
“Small Caps are finally starting to participate in the EPS revisions recovery,” said Calvasina, referring to their earnings per share. “The rate of upward EPS estimate revisions has moved up to 50% for the Russell 2000,” she said, with more than half the sectors in the index “now in positive revisions territory for both EPS and revenues.”
Utilities, consumer staples, healthcare, industrials, communications services, information technology and the category labeled TIMT, or technology, internet, media and telecommunications, are among the areas that RBC highlighted as having both positive EPS and revenue revisions among small-cap stocks.
According to the note, small-cap stocks usually bottom three to six months before EPS forecasts start rising again.
“The Russell 2000 has continued to fight for a bottom relative to the S&P 500 with the relative ratio between the two indexes just a touch above its March 2020 lows,” said Calvasina.
The S&P 500, a measure of large-cap stocks in the U.S., is nearing a bear-market exit based on its trading level of around 4,287 in afternoon trading Monday, FactSet data show, at last check. The popular index will exit its bear market at or above 4,292.438, according to Dow Jones Market Data.
U.S. stocks were trading mixed Monday afternoon, with the S&P 500
SPX,
up 0.1%, the Dow Jones Industrial Average
DJIA,
down 0.3% and the Nasdaq
COMP,
gaining 0.2%, FactSet data show, at last check.
As for small-cap stocks, the Russell 2000
RUT,
was down 1.1% in Monday afternoon trading. That’s after jumping 3.6% on Friday to close with its largest daily percentage gain since Nov. 10, according to Dow Jones Market Data.
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