With the Russell 2000 having significantly underperformed the S&P 500 year-to-date, it is tempting to wonder if it is now the time to invest in small-cap stocks, Jack Manley, a Global Market Strategist at JP Morgan Asset Management, said.
Key quotes
“Sector weights: While a tilt in favor of Health Care could be beneficial given the current health crisis, the underweight to technology and, perhaps more importantly, the overweight to highly sensitive sectors, put small-cap stocks at a disadvantage as long as the pandemic persists.”
“Earnings potential: Consensus estimates for 2020 small-cap earnings growth are far worse than for large-cap companies, and revisions have been more severe: Russell 2000 EPS is expected to contract by 43% in 2020, compared to 18% for the S&P 500. This contraction in earnings estimates has put significant upward pressure on small-cap valuations, which are now quite rich relative to history.”
“Financial health: With a net debt-to-EBITDA ratio roughly three times the size of that for large-cap stocks, the Russell 2000 is highly leveraged at a time when companies will likely be adding to their debt burden.”
“Elevated uncertainty suggests that the most prudent course of action is one of caution, rather than aggression. Investors must temper their expectations and remain patient. There will likely be a time for small-caps to recover in the future, but now is not it.”
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