BofA cools on small-cap stocks, recommends mid caps

BofA strategist Jill Carey Hall is not particularly upbeat on the long-term outlook for small caps and believes that investing in them is risky at the moment, reports CNBC. In the current situation, she urges investors to focus on mid-cap stocks.

Hall believes that investing in small caps carries significant risks at the moment, citing immigration reform and macroeconomic uncertainty, which could hinder a recovery in smaller firms’ profits.

Another problem may be higher for longer interest rates, as that could lead to widening credit spreads, according to Hall. Having cut rates three times in 2024, the Fed hit the pause button in January. Fed Chair Jerome Powell stated in February that reducing policy restraint too fast or too much could undermine progress in slowing inflation. In February, the U.S. CPI rose 2.8% year over year — a slightly lower pace than in January but still above the Fed’s 2% goal.

BofA is not optimistic on the long-term prospects of small caps, Hall concludes. She advises investors to shift focus to mid caps.

Lately, analysts have been increasingly skeptical about the outlook for small caps.

In February, BofA noted the strongest pessimism among small-cap executives in 20 years, having analyzed transcripts of recent earnings calls, as Bloomberg reported. 

Sentiment toward small-cap stocks is worse than it has been in months, Bloomberg added. The small- and mid-cap-tracking Russell 2000 index has plunged 17% from its post-election high in November. Investors are no longer banking on Donald Trump’s policies or Fed rate cuts, Bloomberg argues.

However, Noble Capital Markets has taken the opposite view, arguing that now is the best time to invest in small-cap stocks. It believes that with tech stocks, which had been driving the market for a long time, are now facing sustained headwinds, small caps could be a viable alternative.