BofA Securities is recommending investors look to small-cap companies in 2023 as a hedge in a declining market, which it sees as pricing for a “deep recession.” The company expects this part of the market to receive 12% of its annual returns in next ten years.
“We think any further pullback will be more restricted to smaller companies than to large cap companies, and once the market bottoms out, this is usually the strongest bull period. for small companies,” the analysts wrote in a November 28 note, adding that they have seen a downward trend. The S&P 500 bottomed out in mid-2023.
The BoA says it sees small-cap stocks discounted because of a “deep recession,” while the Russell 2000 index (IWM) is poised to realize an annual return of 12% per year for the next decade. For comparison, BofA forecasts the S&P 500 (SP500) posted an annual increase of just 5% over the same period.
The bank also noted that small caps outperformed the broader market during three recessions in the 70s and 80s, a period in which the Fed also faced high inflation. BofA considers stocks in the energy, financials and food sectors to be “best positioned,” but cautions against investing in healthcare stocks.
The BoA points out that one drawback of small-cap companies is their debt burden, which is often related to short-term or floating-rate interest rates that can affect operating income if interest rates remain high. after 2024. But the bank said it believes such “bad news” is already priced into certain stocks.