Small-cap Stocks Are Projected to Rise 50% by 2024 According to Wall Street's Biggest Bull

According to one of Wall Street's prominent optimists, small-cap stocks are primed for substantial outperformance throughout 2024.

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Tom Lee from Fundstrat reaffirmed his projection that the small-cap Russell 2000 (RUT) index could surge by 50% and surpass 3,000 points for the first time in 2024. This comes after the index marked its most significant daily gain in over a month on Wednesday.

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During an interview with CNBC's Brian Sullivan, Lee emphasized that small-cap stocks are likely to benefit the most from the Federal Reserve's interest rate cuts, a sentiment echoed by numerous analysts and traders on Wall Street. Small caps showed strong performance on Wednesday following assertions from senior Federal Reserve officials regarding their outlook for three interest rate cuts in 2024.

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Lee pointed out that small caps boast attractive valuations relative to the S&P 500, which should stimulate demand. While the Russell 2000 as a whole trades at over 22 times expected earnings for 2024, this figure is influenced by the presence of unprofitable or marginally profitable companies in the index. Lee noted that reliably profitable small-cap companies are valued at only 11 times earnings, a significant discount compared to the S&P 500's multiple of 21, based on data.

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Lee suggested that the current year's upswing could be just the beginning. He drew a parallel between the valuation gap between small- and large-cap stocks now and the situation in 1999, when small caps embarked on a 12-year period of outperformance over their large-cap counterparts.

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The composition of the Russell 2000 also plays into its favor. The index includes numerous biotechnology stocks, which have been gaining momentum lately, as well as regional banks, which could benefit from Fed rate cuts alleviating some business pressures.

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Lee expressed his optimism, stating, "I think the Russell 2000 represents the best outcomes when the Fed initiates rate cuts," during his CNBC interview.

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After lagging behind large-cap stocks for three years, small caps surged ahead in November and December, driven by expectations of aggressive interest rate cuts by the Fed. However, this rally paused earlier this year as investors' hopes for up to six interest rate cuts in 2024 faced resistance from top Fed officials. Now, with the Fed signaling a probable start to rate cuts in June despite recent inflationary pressures, small caps seem to be resuming their upward momentum.

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On Thursday, both small- and mid-cap stocks led the way, with the Russell 2000 rising by 1.2% to 2,099 points, and the S&P Midcap 400 increasing by 1% to 3,009 points. In comparison, the S&P 500 climbed by 0.6% to 5,255 points, according to FactSet data. All three indexes were poised for their most substantial weekly gains since late last year.

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