But Steven DeSanctis at Jefferies says they'll recover over the second half of the year.banking system turmoil of the last month
"After tough periods, we find small caps bounce back strongly, and we don't think this time will be different," wrote strategist Steven DeSanctis in a recent note. He pointed to 2000-2001, when small cap stocks performed well even as a recession approached, as an example of small cap resilience. But DeSanctis wrote that given the broader context, investors are more likely to reward companies with strong balance sheets. He also says they'll pay attention to the way the dollar has weakened, as investors have concluded that the Federal Reserve's rate hiking campaign is coming to an end.
DeSanctis also wrote that stocks with higher exposure to business overseas have outperformed their domestic-only peers year-to-date. Between China's reopening, a weaker dollar, and expectations of stronger economic growth abroad than in the US, DeSanctis thinks that trend will continue, so he made sure to screen for stocks that play into that theme.