Also in that note, strategists pointed to their Long Term Valuation Model, which predicts negative S&P returns over the next 10 years for the first time since 1999.
"Price to normalized earnings has a very strong relationship to subsequent S&P 500 returns over the long haul, and the S&P 500's current trailing normalized PE ratio of 29x suggests 10-year annual 12-month price return of -0.8%, representing the first negative returns since the Tech Bubble," strategists led by Savita Subramanian write in that note.
But Subramanian and Jill Carey Hall write this week that "valuations for the Russell 2000 (NYSEARCA:IWM) suggest mid-to-high single digit annualized returns over the next decade, and the relative forward P/E of large vs. small caps (0.78x, vs. the historical average of 1.03x) also suggests small should beat large over the next 10 years."
"While small caps’ long-term returns have admittedly been driven less by valuations than large caps’, the explanatory power of P/E on 10yr returns is still high (~50% vs. ~80% in large)," they add. "We also see other multi-year bullish themes for small caps, including infrastructure/re-shoring, ESG improvement and the fact that we are less than two years into a new potential cycle for small vs. large after underperformance from 2013-20 (cycles have usually lasted about a decade)."
In BofA's small-cap sector ranks:
Cyclicals lead with Consumer Discretionary at the top, followed by Financials, Industrials and Energy.
Consumer Staples is ranked No. 5, followed by Real Estate (making the biggest ranking move up), Materials and Info Tech.
Rounding out the list are Utilities, Communication Services and Healthcare at the bottom.
And despite the distortion from some meme stocks, the Russell 2000 Value (NYSEARCA:IWN) is still historically cheap compared with the Russell 2000 Growth (NYSEARCA:IWO), BofA says.