BofA’s Hall: ‘next year could be a good one for small caps’

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The Russell 2000 index has slid nearly 10% in less than two months, but Bank of America Securities’ Jill Carey Hall says 2022 could be a very different story for small caps.

Hall’s remarks on CNBC’s ‘Closing Bell’

According to Hall, small caps are yet to benefit from the economic recovery. Making her bullish case on CNBC’s “Closing Bell”, she said:

I think next year could be a good year for small caps. Actually, we could see a good decade for small caps. Typically, they do better at this time in the cycle. With some COVID concerns, the relative PE ratio of small versus large caps is now collapsed to extreme lows.

Services spending in now returning after a massive hit due to the global pandemic. If the Omicron variant doesn’t weigh on the ongoing recovery, Hall added, small caps stand to benefit as they are more exposed to services spending.  

Expected annualised returns from small caps

Hall further noted that based on PE multiples, small caps, in sharp contrast to the large-cap stocks, are now cheaper than ever. Adding to her bullish call on small caps, she said:

Small caps are more sensitive to U.S. GDP growth. So, assuming continued recovery there and services recovery, CAPEX spending which could be furthered by infrastructure and more broadly, the restoring of U.S. manufacturing; these are bullish themes for domestic smaller companies.

She expects small caps to generate high single-digit annualised returns this decade. Also on Tuesday, Hightower’s Stephanie Link said economic growth was likely to slow down next year compared to 2021 but will remain above trend at more than 3.0%.

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