UBS analysts predict strong potential for small-cap stocks in the coming months. Their research highlights a historical correlation between small-cap performance and Treasury yields.
"Over the past year, Small Cap stocks have outperformed when Treasury yields have declined," states the UBS note. Conversely, small caps have underperformed during periods of rising yields. Historically, when this relationship deviates, a correction quickly follows.
UBS points to an instance in early February where small caps significantly outperformed large caps "following such a disconnect." They note a similar situation currently unfolding, with large caps outperforming despite falling interest rates since May.
"Since May 30, Large Caps have outperformed by 6.2% despite falling interest rates, a much larger disconnect than the one experienced earlier in the year," says the bank.
"This represents the potential for mid- to high-single-digit Small-cap outperformance over the near term," concludes the UBS report, suggesting a significant upswing for small-cap stocks in the near future.