Chances for outperformance among small-cap stocks have improved significantly, according to quantitative research from Salomon Brothers. In a report, Eric Sorensen, global head of quantitative research, noted the Russell 2000 has outperformed the S&P 500 by more than 700 basis points during the past two months, compared with a 1,000 basis-point lag during the previous five months.
The reasons for the sunnier outlook include higher expectations for economic growth, a stronger dollar, declining stock market volatility and strong relative valuations. According to Mr. Sorensen's analysis, many investors have revised their economic growth projections upward after seeing economic data for the past two months. Salomon's volatility model suggests market volatility is declining and many relative value measures point to undervaluation among small caps relative to large-cap stocks.