LIVE MARKETS-RBC picks small caps over large caps as valuations turn compelling

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RBC PICKS SMALL CAPS OVER LARGE CAPS AS VALUATIONS TURN COMPELLING

RBC Capital Markets has become more constructive on small-cap stocks and now prefers them to large caps, citing improving valuations, stabilizing expectations for additional Federal Reserve rate hikes, and less negative investor positioning.

The brokerage on Monday said recent market volatility has helped reset small-cap valuations, while fund flows and investor positioning indicators suggest sentiment toward the group has started to improve.

The Russell 2000 .RUT gained 13.3% year to date, outperforming the S&P 500 .SPX, which rose 10.7%, according to LSEG data.

Small caps appear "modestly, though not deeply, undervalued," said Lori Calvasina, head of US equity strategy at RBC, adding that positioning has become less stretched than it was earlier this year.

The brokerage also said earnings revisions have been most favorable on small-cap energy and technology sectors, helping support its preference for the asset class despite broader market uncertainties.

Within large caps, RBC said energy has been the strongest-performing sector in the S&P 500 since late July, followed by healthcare. The brokerage noted that energy has benefited from improving earnings expectations and commodity-related tailwinds, while healthcare continues to attract investors because of its relative valuation support and defensive characteristics.

The brokerage also flagged valuation disparities across the market. Industrials, consumer discretionary, and utilities currently screen as the most expensive large-cap sectors, according to RBC, while several other sectors offer more attractive valuation support.

The brokerage said technology valuations have become more reasonable, but earnings revision trends, particularly in semiconductors, have yet to improve enough for the brokerage to adopt a more positive stance.

(Akriti Shah)

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