BMO Capital is bullish on small and mid-cap stocks: attractive valuations and typically outperform during Fed rate cut cycles
BMO Capital Markets Chief Investment Strategist Brian G. Belski pointed out in a report that the valuations of small and mid-cap stocks remain attractive to investors. Data shows that small-cap stocks are trading below their 20-year average levels, while mid-cap stocks are slightly higher. History has shown that small-cap stocks perform well after a Fed rate cut, with an average increase of over 10%. Despite the current oversold performance of small and mid-cap stocks, a rebound is expected. The strategist recommends investors to increase their investments in small and mid-cap stocks
According to the Zhitong Finance and Economics APP, Brian G. Belski, Chief Investment Strategist at BMO Capital Markets, stated in a report that the valuation background of small and mid-cap stocks remains attractive to investors seeking to increase exposure.
Data from BMO Capital Markets shows that small-cap stocks (S&P SmallCap 600 Index) are still trading at a discount compared to their 20-year average, while mid-cap stocks (S&P MidCap 400 Index) are trading at a slight premium. On the other hand, the trading price of the S&P 500 Index is significantly higher than its 20-year average.
Historical data shows that small-cap stocks tend to benefit once the Federal Reserve starts cutting interest rates. Since 1995, in the year following the first rate cut by the Federal Reserve, the average gains for the S&P SmallCap 600 Index and the S&P MidCap 400 Index have reached double-digit percentages, at 12.8% and 10.7% respectively, compared to the S&P 500 Index's average gain of 6.7% during the same period. Additionally, when rate cuts occur during periods of economic growth, the average returns for mid-cap and small-cap stocks both exceed 20%.
However, the strategist points out that after achieving one of the best monthly performances in July, the relative performance of small-cap and mid-cap stocks is currently at "severely oversold levels", but "from our perspective, these trend reversals are only a matter of time".
Over the past 30 years, rapid rebounds have typically followed such weakness, with average performances for small-cap and mid-cap stocks exceeding 3.1% and 3.9% over all rolling one-year periods. Furthermore, from 2021 to 2022, the combined growth rates for small-cap and mid-cap stocks have accelerated sharply, with peak growth rates of 26.1% and 19.7% respectively.
The strategist stated: "We believe that pessimism has peaked, making a rebound more likely. Recent trends have already shown some improvement." He recommended investors to increase their exposure to small-cap and mid-cap stocks, stating that "the turnaround is only a matter of time".
The strategist also mentioned that the following stocks with outstanding performance are in line with the theme, including: Bunge Limited (BG.US), Constellation Energy Group Inc. (CEG.US), Criteo S.A. (CRTO.US), Dayforce Corporation (DAY.US), Digital Realty Trust, Inc. (DLR.US), Entegris, Inc. (ENTG.US), Expand Energy Limited (EXE.US), Exelixis, Inc. (EXEL.US), Restaurant Brands International Inc. (QSR.US), Rubrik, Inc. (RBRK.US), Ross Stores, Inc. (ROST.US), RPM International Inc. (RPM.US), Snap Inc. (SNAP.US), The Trade Desk, Inc. (TTD.US), Take-Two Interactive Software, Inc. (TTWO.US), US Foods Holding Corp. (USFD.US), Vistra Energy Corp. (VST.US)