Despite the market rally in January, analysts at Bank of America noted Monday that small-caps got cheaper during the month.
The firm said in a memo that small-caps are priced for conditioned credit deterioration and no manufacturing recovery.
"SMID-cap multiples contracted amid Jan.'s sell-off: the Russell 2000 forward [price-to-earnings (P/E)] fell to 14.3x from 14.7x and the Russell MidCap P/E fell to 17.0x from 17.2x," the analysts explained. "Meanwhile, the Russell 1000 forward P/E expanded to 19.9x from 19.7x."
As a result, the relative P/E for small-caps compared to large-caps at 0.72x (from 0.75x) is 28% below the historical average, according to Bank of America.
"Small caps remain the only size segment that is historically cheap," they added. "For long-term investors (where P/E is more predictive over a 10yr horizon than near term), valuations imply 10% annualized returns over the next decade for the Russell 2000 vs 3% for the Russell 1000," the analysts said.
Overall, the bank's conviction remains high in sticking with value within small and mid-caps for 2024, which they state has "more high-quality stocks/fewer non-earners" and historically outperforms when profits growth inflects and when the Fed is done hiking.