- Small-cap stocks could soar as much as 60% in 2024 thanks to compelling valuations, according to Fundstrat's Tom Lee.
- Lee told CNBC on Tuesday that the valuation of small caps relative to the S&P 500 hasn't looked this attractive since 1999.
- "That was the starting point for 12 years of profits," Lee said.
An Overlooked Stock Market Area Will Soar in 2024 After Significantly Underperforming S&P 500 last year, according to Fundstrat's Tom Lee.
In an interview on Tuesday, Lee he told CNBC that small-cap stocks could soar as much as 60% this year thanks to compelling valuations relative to the S&P 500.
"I think small caps could make a bigger move [than large cap stocks], you know, 50% or 60%. I think the Russell 2000 could end the year above 3,000," Lee said. The Russell 2000 was trading around 1,910 on Wednesday.
He Russel 2000 lagged the S&P 500 significantly in 2023, gaining about 17% compared to a gain of about 24% for the large-cap index. That underperformance has extended into 2024. Year to date, the Russell 2000 is down about 7% compared to a 1% drop for the S&P 500.
But Lee said valuation measures make the Russell 2000 small-cap index much more attractive compared to the S&P 500.
"Small caps relative to the S&P 500 on a price-to-book basis are back to where they were in 1999, which was the absolute bottom and was a starting point for 12 years of outperformance for small caps." capitalization," Lee said.
Lee has called small-cap stocks his best idea for 2024, partly due to the idea that participation in the current stock market rally is improving and is no longer concentrated just in mega-cap tech stocks, as was the case in 2023. If so, if breadth is seen as improving in the stock market, then small-cap stocks should get a bid, Lee said in his 2024 outlook.
Lee also said in its outlook for 2024 that three factors could help boost small-cap stocks in 2024.
First, fund flows into the stock market are necessary for small-cap stocks to outperform, according to Lee. If retail funds do not flow into the stock market, then funds likely will not flow into small cap stocks. That could change in 2024, as investors begin to flock to the stock market.
Second, small-cap stocks are highly leveraged and tend to have a higher cost of capital, so a drop in interest rates should benefit small-cap stocks much more than large-cap stocks.
Finally, an expansion in economic growth could be a "big tailwind" for small-cap stocks since they are highly exposed to the domestic economy.
