Credit Suisse: Small Cap Stocks Vulnerable

Friday, 26 Jul 2013 09:00 AM

By Dan Weil

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Small cap stocks have led the way during the market's rally over the past year, and that's making some experts wary of them.

The Russell 2000 Index of small cap stocks has jumped 37 percent during that period, compared with 26 percent for the Standard & Poor's 500 Index. And the Russell 2000 just hit a record high of 1,056.86 Tuesday.

"Although the Russell 2000 has just made another new all-time high, we confess that we still can't quite get comfortable with the move we've seen," says Lori Calvasina, small cap strategist at Credit Suisse, according to CNBC.

Editor's Note:
 
Prophetic Economist Warns: “It’s Curtains for America.” See Evidence.

"To get more bullish, we need to see more evidence that the economy and earnings are poised to re-accelerate in the back half of the year."

Credit Suisse uses six measurements to form its views about small cap stocks, and only two are now positive — investor sentiment and retail money flow.

With small cap stocks trading at 17 times earnings and the profit outlook of these companies shaky, there seems to be little justification for further gains, CNBC reports.

The Russell 2000 may find strong resistance around 1,060, Todd Salamone, senior vice president at Schaeffer's Investment Research, tells CNBC.

One thing small cap stocks have going for them is economic growth, despite Calvasina's fears, says David Kostin, chief U.S. equity strategist at Goldman Sachs.

"Roughly 80 percent of Russell 2000 sales are derived domestically, compared with 66 percent for the S&P 500," he writes in a report obtained by Business Insider. And Goldman Sachs economists expect U.S. gross domestic product growth to exceed 3 percent from 2014 to 2016.

Editor's Note: Prophetic Economist Warns: “It’s Curtains for America.” See Evidence.

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