Evercore called June the best opportunity for small-cap stocks

June could be a favorable month for small-cap stocks, according to Evercore analysts. In their opinion, it will be a window of opportunity for small companies to catch up and overtake the big players. Fundstrat founder Tom Lee also spoke about the right time for such investments last week;

Evercore ISI's team of analysts, led by Julian Emanuel, called June the best seasonal opportunity for small-cap stocks, writes MarketWatch.

In the first five months of 2025, large companies outperformed small companies by 9%, the publication calculated. This undervaluation is understandable: the turbulence caused by the uncertainty of U.S. trade policy is hitting small, domestic-oriented companies, which are sensitive to interest rates and consumer sentiment, particularly hard. The broad market S&P 500 index is now trading just 3.78% below its February highs after hitting record highs in May, with other segments of the market virtually ignored by investors in buying on the drawdown, MarketWatch points out. 

The Russell 2000 Index, which tracks small-cap stocks, is down 5.7% since the beginning of the year. By comparison, the S&P 500 Index has gained 1.5% over the same period.

As Evercore notes, June - the month that coincides with the Russell index rebalancing - historically turns out to be favorable for small-cap companies. At that, "when the outperformance of large-cap stocks by May was as pronounced as it was this year, the seasonal effect was particularly pronounced," the investment bank analysts wrote.

"The potential for small companies to outperform is enhanced by more attractive valuations on multiples compared to large companies, and with the Federal Reserve on course to cut rates further with moderate economic growth in 2025," Evercore said in a note.

Analysts at the investment bank suggested investors invest in a broad set of small-cap stocks through the iShares Russell 2000 ETF, which is tied to an index of the same name, MarketWatch reports. Among the individual stocks in the fund, the publication mentioned telemedicine platform Hims & Hers Health, whose value is up 126% this year, thanks in part to April's momentum following a partnership with Danish pharma giant Novo Nordisk. Shares of supermarket chain Sprouts Farmers Market are up 38% since the beginning of the year, and some executives believe a focus on local products is helping the company be less vulnerable to trade wars, MarketWatch points out.

A bet on small companies now looks unobvious, MarketWatch notes: many of the big banks on Wall Street have so far avoided active recommendations in this segment. Among those who supported small-cap stocks is Fundstrat Global Advisors managing partner Tom Lee. He believes small-cap securities have a strong case for growth in the second half of the year. If investors believe the period of duty pressure is behind them and look toward 2026, when the Fed is expected to move to ease policy, undervalued small-caps will look like a sound investment idea, the strategist said.

But John Higgins, chief market economist at Capital Economics John Higgins thinks small-cap stocks won't catch up soon, wrote MarketWatch. They will likely continue to lag the big players, as they have done for much of the past decade, even if economic concerns abate. 

"[U.S. small-cap stocks] may get a little easier if anxiety about the outlook for the U.S. economy eases. That's what we expect, despite possible flare-ups in trade war tensions in the coming months. Still, it may not be enough for a sustained reversal," Higgins wrote in the report, which is available from MarketWatch.

Proponents of small-cap stocks often cite their attractive multiples, but, according to an expert at Capital Economics, an attractive valuation rarely helps pinpoint the exact moment of entry. Moreover, investors in general are now not set on finding undervalued players, but are willing to pay a premium for AI-related bigtech securities, Higgins notes.

Interestingly, the weak relative performance of small caps this year is predominantly a U.S. phenomenon: in Europe, small companies are showing much stronger results compared to large companies, MarketWatch writes.