LIVE MARKETS-Turning a corner or time to trim small caps?

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TURNING A CORNER OR TIME TO TRIM SMALL CAPS?

Small cap stocks rebounded nicely from their early April lows along with large caps but Edward Lee, investment strategy analyst at Wells Fargo Investment Institute (WFII) still favors large and mid-cap equities over small.

From April 8 through May 12, the Russell 2000 .RUT jumped around 19% and has since traded more or less sideways.

Lee said sentiment around small caps was re-invigorated by the "abatement of tariff fears; better-than-expected economic data; and an all-around solid earnings season."

And going forward investors are expecting deregulation, lower short-term interest rates and a cyclical recovery late this year and into 2026, said Lee.

But still, on the other side of the coin he noted tariffs that are more aggressive than initially thought and earnings revisions that have continued to deteriorate due to higher than expected interest rates and tariff rates.

The research note shows that 2025 earnings per share estimates have been revised down for large, mid- and small cap indexes in the last 3 months.

But the Russell 2000 downward revision was a much steeper 9.8% compared with a 4.6% revision lower for mid-caps represented by the Russell midcap index and 2.2% for the large cap S&P 500 index .SPX, according to data presented by WFII.

With all this in mind the analyst wrote that he sees the positives and negatives "roughly in balance" leading to his neutral tactical rating on small caps.

Because of these headwinds and an anticipated near-term economic slowdown, Lee says "we would use this opportunity to trim small cap holdings back to long term target allocations, and reallocate into large-cap and mid-cap equities."

(Sinéad Carew)

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