While investors’ attention is focused on hype topics such as AI or Bitcoin, well-known Wall Street bull Tom Lee sees enormous potential in a completely different place: in US small cap stocks.
• US small caps underperformed in 2023
• Tom Lee calls small caps his best idea for 2024
• Many favorable factors
The stocks of small US companies underperformed last year: the Russell 2000 small cap index rose by only 17 percent in 2023, while the S&P 500, which reflects the broad US stock market, rose by a strong 24 percent at the same time. But while this underperformance has continued into the first few days of 2024, Tom Lee, co-founder of investment advisory firm Fundstrat Global Advisors, is extremely optimistic about what’s next for US small caps.
Soaring expected for US small caps
Lee, who is generally known for his bullish predictions and support for cryptocurrencies, called US small caps his best idea for the new year in a 2024 outlook and predicted a run higher: “I think small caps are one bigger jump [als Large Caps] could do, you know, 50 or 60 percent. I think the Russell 2000 could end the year at over 3,000 points,” Lee said in an interview with US broadcaster CNBC.
According to Lee, the ongoing stock market rally is becoming broader and is no longer focused solely on mega-cap technology stocks, as was the case in 2023. This should benefit small-cap stocks, according to the veteran analyst.
He also referred to the historically cheap valuations: “Compared to the S&P 500, small caps are back to the level of 1999 on a price-to-book ratio basis, the absolute low point and starting point of twelve years of outperformance for small caps,” said Lee.
What could drive US small caps
Tom Lee, considered Wall Street’s biggest bull, listed three factors that could give this often-overlooked area of the stock market additional momentum. First, fund inflows into the stock market are necessary for small-cap stocks to outperform. There could be an encouraging development here in 2024 if private investor money increasingly warms up to equity investments.
Second, small-cap stocks are heavily leveraged and therefore tend to have a higher cost of capital. This means they stand to benefit from interest rate cuts much more than large-cap stocks. According to the latest Fed minutes, the US monetary authorities currently see the key interest rate at its peak or at least close to it. It said it was prepared to cut interest rates if the decline in inflation continued in 2024. They have therefore signaled at least three interest rate cuts for 2024. Many market participants even consider this to be a conservative estimate and are expecting up to six reductions.
Another important factor is that small companies are usually not globally positioned but are predominantly dependent on the domestic economy. Therefore, expanding U.S. economic growth could become a “tremendous tailwind” for small-cap stocks, Lee said.
Editorial team finanzen.net