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“We were caught offside by the sharp correction in small, but we remember other periods when small was hit hard, then rebounded nicely from the low,” said Jefferies.
Although the chances of a recession have increased, the firm believes small caps can hang tight, as it did in ’00-01, given current valuations, falling estimates, big earnings beats, and accelerating M&A. The firm expects cyclicals to rebound in the second half, as they have given back their outperformance.
Despite Jefferies’ themes being hit hard, the firm sees better balance sheets performing slightly better and room for improvement. Cheapest stocks have been hit hard, which makes sense, while higher foreign sales are outperforming YTD. “More importantly, active managers have started to regain their strength relative to their benchmarks with now more than half beating YTD. This does not sound great, but in the early part of January this number stood in the low 20% range,” added the firm.
By Davit Kirakosyan
