Spring for small caps? Oppenheimer recommends Invesco Small-Cap ETF (XSMO.US) and four small-cap stocks
1min read Oppenheimer's analyst recommends investors focus on Invesco Small-Cap Momentum ETF (XSMO.US), which he believes outperforms the Russell 2000 Index (IWM.US), and suggests buying four small-cap stocks including Archrock Inc. (AROC.US), AZZ Inc. (AZZ.US), Griffon (GFF.US) and Palomar Holdings (PLMR.US).Oppenheimer's technical analysis head Ari Wald noted in the report that the Invesco Small-Cap Momentum ETF is one of the few small-cap benchmarks that broke through its 2021 peak in July and further broke through after the election.The Russell 2000 Index has reached its 2021 November peak, and its ability to break through this resistance level is significant for the entire market cycle. The ratio of the Russell 2000 Index to the S&P 500 Index has risen above its 200-day average, which is a positive signal for small caps. The analyst recommends focusing on small caps as the attractiveness of large caps may wane as the bull market cycle enters its third year.In addition, the three-year change rate of the Russell 2000 Index is entering the positive territory after one of the worst periods in history, a change that has only occurred in 1990, 2003, 2009, and 2020.Wald believes the low readings indicate that the current market lacks a bubble, which is why they believe the downward cycle that starts from the current level is more likely to be a minor correction in the long-term bull market.The momentum indicator for the Russell 2000 Index has risen 45% since its June 2022 low, and it is expected to reach its upper limit in the second half of 2025. In the past 90 years, there have been 22 cycles in which small caps and large caps have alternated, with small caps delivering higher returns in the major cycles, a phenomenon known as the small-cap premium.Wald noted that the current large-cap cycle began in 2021 and is part of a larger cycle that has favored large caps since 2013. Therefore, Oppenheimer's analysts believe it is time to focus on and invest in small caps to capture this market trend.