“Large-cap stocks still look to be better positioned for Q-4 than Small-cap stocks”– Paul Ebeling
A promising October for Small-cap stocks hit bump Monday as a powerful rally in tech giants left everyone else behind.
For investors seeking advice on whether now is the time to rotate asset classes, 2 prominent Wall Street strategists differ.
Goldman Sachs’ (NYSE:GS) strategist says the backdrop favors going big, with the 5 largest technology firms poised to report earnings growth in Q-3 Vs a decliner in profit for members of the Small-cap Russell 2000 Index (RUTX)
His counterpart at Morgan Stanley (NYSE:MS) disagrees, and prefers smaller companies, saying their earnings prospects are improving faster thanks to a recovering economy.
Analyst estimates for next year’s profits have risen 17% in the past three months for Small-caps, way ahead of a 1.8% increase for the Large-cap S&P 500 Index, the firm’s data show.
“They saw sharper cuts to their numbers in the wake of the pandemic and it makes sense to us that they will see a more powerful recovery, this observation is core to our recommendation to favor small-cap cyclicals,” he said.
The US stock market in Y 2020 has been dominated by the large tech companies on bets that they are better positioned for the stay-at-home economy than counterparts dependent on person-to-person contact.
Retail investors and Managed Money is questioning how long the NAS’ outperformance can last after the tech-heavy NAS Comp rose more than 30% YTD, compared with a slight decliner if 1.9% for the Russell 2000.
It is a turnaround from the prior 2 wks, when Small-caps outperform, bolstered by speculation that more aid/relief/stimulus was coming. Despite a day of lagging returns, the Russell 2000 has beaten the S&P 500 by almost 4% in October, on pace for its best month of relative return in 3 yrs.
But investors may be better off leaning toward large companies as earnings season kicked off this wk Profits for the Big Five (FAANG’) probably grew 1% in Q-3, compared with a 40% fall for companies in the Russell 2000, my estimates show.
Again, Large-cap stocks still appear better positioned for Q-4 than Small-cap stocks.
Note: “In my experience large caps are less risky that small caps and their returns are easily predicted, while small caps are more speculative and often result in failures, bringing little or no returns. And large caps are for the investor who seeks long-term returns”– Bruce WD Barren, economist and professional investor.
Have a healthy day, Keep the Faith!