Small-Cap Stocks Are in the Doghouse. What Could Lift Them Out.

One tailwind is upward earnings revisions, according to RBC Capital Markets.

The Fed has raised its benchmark lending rate 11 times over the past 18 months to a level not seen for 22 years as it grapples with inflation still stubbornly above its long-run target of 2%. But economists expect the Federal Reserve to start cutting rates in the second quarter of next year. Another tailwind that could boost small-caps is a pick up in mergers and acquisitions. There may not be many deals in the offing right now, but Wall Street seems to be betting that conditions are about to become more favorable for deal makers. On Monday J.M. Smucker Co. , the food company famous for jams and jellies, reached an agreement to buy Hostess for about $5.6 billion, or $34.25 a share.

Another factor favoring small-caps in the near term is their attractive valuations, said Bill Talbot, a senior portfolio manager and head of U.S. small-cap equities at Manulife Investment Management, in a recent note. “Small-caps’ recent underperformance relative to large-caps has left the Russell 2000 at its most inexpensive level relative to large-caps in more than two decades, dating to the period when the technology stock bubble burst in 2000,” he said.

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