Macro strategist explains why it's a good time to own Russell 2000
Investing.com -- In a note to clients on Monday, Evercore ISI analysts argued that despite recent struggles, "universally unloved Small Caps" are now in a "So Bad, It's Good" tactical position, making it an opportune time to buy the Russell 2000.
Small Caps have been particularly impacted by tariffs and uncertainty, suffering as "Price Takers, not Price Makers," said Evercore.
They note that the year-to-date performance through May ranks among the weakest since 1990, extending an underperformance streak approaching Dotcom troughs.
However, Evercore ISI suggests that with trade uncertainty potentially peaking, the current "cratered sentiment intersects with favorable June seasonality."
They explain that historically, the "Small Size reliably outperforms" in June, coinciding with the annual Russell Index Rebalance.
This trend is expected to be amplified in 2025, given strong historical reversion in years with similarly weak year-to-date Size factor returns.
Beyond this tactical opportunity, the longer-term case for Small Cap outperformance rests on "attractive valuation vs. Large Cap," a "cutting Fed," and "potential Policy (Trade/BBB legislation) catalysts."
Evercore ISI recommends buying IWM (iShares Russell 2000 ETF) for broad exposure. Additionally, they screen for "Small Size, Big Alpha" stocks – Russell 2000 companies exhibiting "Strong Sentiment and High Profitability."
They also suggest pairing these investments with "Set It and Forget It" SPY Option Hedges ahead of potential summer volatility.
The analysts note that a recent rally in stocks following Trump-Xi talks and a solid Jobs report has eased earlier concerns.
'With SPX at 23x 2025e EPS, selectivity (positioning, options hedges) is key,' concludes Evercore.
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