(Finance) – After an underperformance of 25% since the first quarter of last year, the US small caps have revived in the last weekoutperforming large caps by 10%, helped by a 30bp drop in bond yields (raising hopes that this will ease financial pressures on small caps, given their greater exposure to floating rate debt), rising expectations of a Trump presidency (which is projected to lead to deregulation that is favorable to small businesses) and interesting ratings (with small caps trading at a near-record 30% P/E discount to large caps), Bank of America said in a research note on the topic.
In Europei movements were more contained: A 10% underperformance over the past year has been followed by a modest 2% reversal in recent days, but even here the starting point for small caps is interesting after a 30% underperformance since 2021, which has left the relative P/E near historic lows.
Bank of America expects growth momentum in the eurozone and the US to weaken in the coming months as the boost from US fiscal stimulus fades and the dampening effect of tight monetary policy kicks in, in line with the decline in US and eurozone PMIs, which leaves analysts skeptical defensively positioned. Analysts, however, maintain a handful of cyclical coverage against the possibility that the unusual post-Covid macro cycle will continue to surprise to the upside, including European chemicals, luxury goods and small versus large caps, which have failed to participate in the recent cyclical rally.
The investment bank expects rising risk premiums and falling bond yields to be a net negative mix for equities, with macro projections implying a 15% downturn for the Stoxx 600 to 450 by the first quarter, as well as a 10% underperformance for European cyclicals versus defensives after a 7% retreat since April. Bank of America is overweight in the defensive food and beverage and pharmaceutical sectors, as well as underweight in the banking and capital goods sectors.