Small caps have been long-term winners, and big winners (relative to the rest of the market) since the late-August 2009 got revving up.
But today’s big gain notwithstanding, that outperformance is starting to look tired, and there’s a growing chorus of folks calling for large caps to outperform. Inflation fears and the rise of oil prices is one reason: big companies can absorb this stuff easier.
In a new note, BofA/ML expands on the end of small cap dominance.
For one thing, the fundamentals just aren’t that favourable. Small caps have been the least likely to beat estimates on both the top and bottom lines.
Another crude measure is looking at the percentage of companies trading below 10x 2012 earnings. Right now the number is historically pretty low.
Finally, estimates and optimism remains too high given the economy:
Given the fact that small caps and mid caps are much more reliant on US economic growth and the fact that oil prices will have an impact on GDP growth, we think expectations for small caps are still awfully high. Our last look at 2011 earnings growth has the Street thinking that small-cap earnings should be about 20% led by two sectors we are Underweight—Consumer Discretionary and
Financials (Small-Cap Strategy, 28 February 2011). Estimates have started to come down, but we don’t think they are falling fast enough and given where oil prices are today, they may need to come down even faster and this should hurt relative performance. The three-month moving average revision ratio stands at 1.12 and the average estimate is barely in the black at 0.09%