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An overlooked area of the stock market could soar 60% in 2024 with valuations signaling a big run ahead, Fundstrat says

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An overlooked area of the stock market could soar 60% in 2024 with valuations signaling a big run ahead, Fundstrat says

Cindy Ord/Getty Images

Small cap stocks could soar as much as 60% in 2024 on 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 haven’t looked this appealing since 1999.

“That was a launch point for 12 years of gains,” Lee said.

An overlooked area of the stock market is set to soar in 2024 after significantly underperforming the S&P 500 last year, according to Fundstrat’s Tom Lee.

In an interview on Tuesday, Lee 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 traded at around 1,910 on Wednesday.

The Russell 2000 trailed 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 spilled over 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 that valuation measures make the small cap Russell 2000 index much more compelling when compared to the S&P 500.

“Small caps relative to the S&P 500 on a price-to-book basis is back to where it was in 1999, which was the absolute low and was a launch point of 12 years of outperformance for small caps,” Lee said.

Lee has called small cap stocks his best idea for 2024, in part because of the idea that participation in the ongoing stock market rally is improving and is no longer concentrated in just mega-cap tech stocks, like it was in 2023. If so-called breadth improves in the stock market, then small cap stocks should catch a bid, Lee said in his 2024 outlook.

Lee also said in his 2024 outlook 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 aren’t flowing into the stock market, then funds likely aren’t flowing into small cap stocks. That could change in 2024 as investors start to warm up to the stock market.

Second, small cap stocks are highly levered and tend to have a higher cost of capital, so a decline in interest rates should benefit small cap stocks much more than large cap stocks.

Finally, an expansion in economic growth could be a “huge tailwind” for small cap stocks as they are highly exposed to the domestic economy.

Read the original article on Business Insider

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