There’s more juice left in the historic small-cap rally, according to State Street Investment Management.
“It’s not a junk rally,” Matt Bartolini, the firm’s global head of research strategists, told CNBC’s “ETF Edge” this week.
Bartolini cited a promising trend: more Wall Street firms are upgrading small-cap earnings expectations than downgrading them. This means higher earnings per share estimates for this year, including for the upcoming third and fourth quarters. He added that this quarter will likely see over 20% EPS growth.
He also cited stronger relative momentum, and the “depth and breadth” associated with the small-cap stock market. “You have all 11 small-cap GICS sectors outperforming their respective large-cap GICS sectors. That hasn’t happened in over 30 years,” Bartolini said.
He added that not-so-heavily shorted small-cap stocks are outperforming heavily shorted ones, which is a signpost of a sustainable rally. “If this was a snapback junk rally where it was a short squeeze, it would be the inverse,” he said.
State Street’s SPSM and SLYG, exchange-traded funds which track the S&P 600 Small-Cap and S&P 600 Small-Cap Growth indexes, respectively, are both up more than 20% this year, according to CNBC data. In the same timeframe last year, SPSM fell almost 2% and SLYG increased just 0.86%.
The Russell 2000 Index – the most popular small-cap stock benchmark and the index underlying IWM, the iShares Russell 2000 ETF – is also up close to 20% this year, its best first half since 1991 when George H.W. Bush was in office.
“You have that fundamental momentum, the relative price momentum, [and] the idea that [the small cap trade] is more enduring,” Bartolini said.
Performance of small-cap stocks versus large-cap stocks over the past year.
Phil McInnis, chief investment strategist at Avantis Investors, says the historic small-cap rally should be a signal to investors to look beyond the large-cap trade. “Some investors … don’t even realize [that] if you’re buying the S&P 500, yes, that’s giving you pretty decent exposure to the stock market, but it’s nowhere close to the full stock market,” he said on “ETF Edge.”
“I still see large-cap flows getting a lot more attention versus small caps,” he added, citing combined mutual fund and ETF data. “I still think small caps are maybe being overlooked by a lot of investors, and I think there’s a massive reason to have them in your portfolio.”
Along with small-caps, McInnis — whose firm manages multiple small-cap funds among other stock and bond investments — is stressing non-U.S. developed markets, emerging markets, and mid-caps as other asset classes where investors should consider adding exposure. Emerging markets, in particular, have performed “tremendously well” over the last year, he said.
IEMG, the iShares Core MSCI Emerging Markets exchange-traded fund, is up more than 18% this year.
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