RBC picks small caps over large caps as valuations turn compelling
IWM•RBC Capital Markets now prefers small-cap stocks to large caps, citing improving valuations and less negative investor positioning. The Russell 2000 gained 13.3% year to date, versus 10.7% for the S&P 500.
1. RBC favors small caps
RBC Capital Markets has become more constructive on small-cap stocks and now prefers them to large caps, citing improving valuations, stabilizing expectations for additional Federal Reserve rate hikes and less negative investor positioning. The brokerage said recent volatility helped reset small-cap valuations, while fund flows and positioning indicators suggest sentiment has started to improve.
2. Valuations and revisions
The Russell 2000 gained 13.3% year to date, outperforming the S&P 500, which rose 10.7%. Small caps appear “modestly, though not deeply, undervalued,” said Lori Calvasina, RBC’s head of US equity strategy. RBC said earnings revisions have been most favorable in small-cap energy and technology.
3. Large-cap sector views
RBC said energy has been the strongest-performing S&P 500 sector since late July, followed by healthcare. Industrials, consumer discretionary and utilities screen as the most expensive large-cap sectors, while technology valuations have become more reasonable; earnings revision trends, particularly in semiconductors, have yet to improve enough for RBC to adopt a more positive stance.
