RBC tilts away from battered small-caps, drops bet on a rebound

RBC Capital Markets said it’s losing faith that U.S. small-cap stocks will stage a comeback this year.

RBC Capital Markets said it’s losing faith that U.S. small-cap stocks will stage a comeback this year. 

The bank had been expecting the shares to recover from a streak of underperformance that’s driven the Russell 2000 Index into correction territory. 

Companies with market values of about US$2 billion or less tend to outperform at times when inflation expectations are rising. But that hasn’t been the case recently, even with consumer prices in the U.S. surging at the fastest pace in four decades. 

The Russell 2000 has dropped almost 6 per cent in 2022, deepening its selloff since November, when the omicron variant was found in South Africa. It now sits more than 13 per cent below that month’s all-time high, exceeding the 10 per cent drop that’s an official mark of a correction, while the S&P 500 is down less than 5 per cent from its peak. 

“We aren’t ruling out a catch-up trade by small caps in early 2022. But we’re no longer counting on it,” Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets, wrote in a note to clients. “We think a better way to play the early 2022 rotation is through large-cap value or cyclical sectors.”