BofA sees small caps poised for 12% annual returns over subsequent decade

BofA Securities is recommending buyers search out small caps in 2023 as a hedge in a declining market, which they view as priced for a “deep recession.” The agency expects this a part of the market to appreciate 12% annualized returns over the subsequent ten years.

“We predict any additional draw back can be extra restricted in small than in giant caps, and as soon as the market bottoms, that is normally probably the most bullish interval for small,” the analysts wrote in a notice dated Nov. 28, including that they noticed the S&P 500 reaching backside in mid-2023.

BoA stated that they see small caps as already being discounted for a “deep recession,” whereas the Russell 2000 (IWM) is poised to appreciate annual returns of 12% per 12 months over the subsequent decade. As compared, BofA forecasts the S&P 500 (SP500) posting annual features of solely 5% throughout the identical interval.

The financial institution additionally famous that small caps outperformed the broader market throughout three financial downturns within the 70s and 80s, intervals that likewise noticed the Fed battling excessive inflation. BofA views shares within the power, financials and staples sectors as “greatest positioned,” however urged warning on investing in healthcare shares.

One draw back to small caps, BoA identified, is their debt load, which regularly is linked to short-term or floating charges that might affect working earnings if charges stay excessive previous 2024. However the financial institution stated it believes such “unhealthy information” is already being priced into sure shares.