Wall Street's biggest bull renews call for small-cap stocks to rise 50% in 2024

By Joseph Adinolfi

Small-cap stocks are poised to be among the biggest beneficiaries of Fed rate cuts, according to Fundstrat's Tom Lee

Small-cap stocks are poised for big outperformance in 2024, according to one of Wall Street's biggest bulls.

Fundstrat's Tom Lee reiterated his call for the small-cap Russell 2000 RUT to climb 50% in 2024 and top 3,000 for the first time after the index scored its best daily advance in more than a month on Wednesday.

During an interview with CNBC's Brian Sullivan, Lee said small-caps are likely to receive the greatest boost from the Fed's interest-rate cuts - a view shared by many Wall Street analysts and traders. Small caps outperformed Wednesday after senior Federal Reserve officials stood firm on their projections for three interest-rate cuts in 2024.

See: Small-cap stocks had a rough start to 2024 - but could shine the rest of this year, says stock market's biggest bull

Cheap valuations relative to the S&P 500 should help boost demand for small caps, Lee said. While the Russell as a whole trades at more than 22 times expected 2024 earnings, that number is skewed by the share of unprofitable or barely profitable companies in the index.

Small-cap companies that are reliably profitable are valued at 11 times earnings, Lee said. That's a bargain compared with the S&P 500's multiple of 21, according to FactSet data.

This year's advance could be just the beginning. According to Lee, the valuation gulf between small- and large-cap stocks is reminiscent of 1999, when small-caps began a 12-year stretch of outperformance that saw them trounce their large-cap peers.

The index's composition could also work in its favor. It has many biotechnology stocks, which have been gaining momentum recently, as well as many regional banks, which could benefit as Fed rate cuts ease some of the pressure on their business.

"I think the Russell 2000 represents the best of things that happen when the Fed starts cutting," Lee told CNBC's Brian Sullivan.

After three years of underperforming their large-cap peers, small caps surged into the lead in November and December, driven by hopes for aggressive interest-rate cuts from the Fed.

That rally stalled out early this year, as investors' expectations for as many as six interest-rate cuts in 2024 received pushback from top Fed officials. Now, small-caps appear to be back in rally mode after the Fed signaled that it will likely start cutting rates in June despite a recent uptick in inflationary pressures.

Both small- and midcap stocks were in the lead again on Thursday, with the Russell 2000 up 1.2% at 2,099, while the S&P Midcap 400 MID was up 1% at 3,009. The S&P 500 SPX was up 0.6% at 5,255 by comparison, according to FactSet data.

All three indexes were on track for their best weekly advance since late last year.

-Joseph Adinolfi

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03-23-24 0745ET

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