Small-cap shares are entrenched in a bear market and look set to fall even further as investors see signs of a contraction coming for the world's largest economy.
Since hitting an all-time high of 2,458.86 in November, the Russell 2000 index has lost 20% on a year-to-date basis.
Equity strategists led by Steven DeSanctis wrote in a research that small is pricing in a nasty recession and decline worse than many bear markets. In the first half of a recession, the average decline for small-caps has been 14.
The bank said that they are done trying to call the bottom of small caps as outflows from both active funds and ETFs persist.
Small and large-cap stocks have been hammered this year as investors anticipate the US economy will tip into a recession as the Federal Reserve increases interest rates to cool down inflation. Inflation is at a four-decade high.
The large-cap S&P 500 index briefly tipped into a bear market last week and looked set to fall on Tuesday.
The size segment is due for a bounce, and the Russell 2000 has lag behind large-cap shares by 23% since mid-March.
The investment bank maintained its overweight recommendation.
It has been a rough few weeks for the Cyclical sectors, but the group is holding up better than Secular Growth and the overall index.
He said that when the bear market ends, this group lags marginally versus Secular Growth right out of the box, and that it plays a game of catch up over the following three months.
The earnings and sales revision ratios are holding up well for thecyclics. Secular growth has dropped to 1.7%, while the estimated earnings growth for the year is 18%.
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