EXCLUSIVE: Small Caps At 'Most Attractive Relative Valuations' Since 1990s, Says Russell Investments' Paul Eitelman

In an exclusive interview with Benzinga, Paul Eitelman, Chief Investment Strategist for North America at Russell Investments, laid out a measured approach to small-cap stocks as we head toward 2025.

While he acknowledges the long-term benefits of maintaining a small-cap allocation, Eitelman also warns of the sector’s sensitivity to macroeconomic shifts.

The Russell 2000 Index is a popular benchmark for measuring small-cap equity performance in the U.S. stock market. It tracks the smallest 2,000 companies, providing a clear view of the small-cap segment. The iShares Russell 2000 ETF IWM, the Vanguard Russell 2000 ETF VTWO and the Avantis US Small Cap Equity ETF AVSC are popular funds tracking the Russell 2000 index.

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‘Small Cap Faces A Two-Scenario Problem’

"We think investors should maintain a strategic allocation to small cap stocks," Eitelman advises. However, the near-term outlook is uncertain: "Small cap faces a two-scenario problem – macro uncertainty is high, with economists conflicted on whether the U.S. economy is slowing toward a soft or hard landing.”

Small-cap stocks have more volatile balance sheets and are highly sensitive to economic cycles, making them vulnerable to a recession but positioned to outperform in a soft landing.

Eitelman suggests taking a cautious approach to tactical positioning during this period of high uncertainty.

Small Caps At ‘Most Attractive Relative Valuations‘

Despite the short-term challenges, Eitelman highlights the longer-term case for small-cap investments: "Small cap companies are trading at their most attractive relative valuations to large cap since the late 1990s."

The market's low stock-level correlations also provide fertile ground for active management, which, in Eitelman's view, "allows investors to limit their exposure to unprofitable companies that make up a large share of the Russell 2000 Index."

His advice to investors is clear: use skilled active managers to navigate this challenging landscape and capitalize on undervalued opportunities.

Read Next:

• Small Caps Set To ‘Lead Their Large Cap Brothers’ For Rest Of 2024, Says Market Strategist

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Image created using artificial intelligence via Midjourney.