By Ryan Vlastelica
NEW YORK (Reuters) - Small-CAP (CAP.CHL)(CAP.CHL)stocks have been pressured of late, with investors fretting that the group's valuation has become untenable, though RBC Capital Markets on Tuesday wrote it sees outsized potential in smaller names.
The group has taken the brunt of the recent market decline, with the Russell 2000 down 7.5 percent from a record close hit in March, far steeper than the S&P 500's 1.7 percent drop from its own high, a divergence RBC wrote represented a contraction in valuations rather than changing fundamentals.
The firm noted that U.S. GDP is expected to accelerate, from which small caps could see a larger benefit. "Small caps are substantially more levered to GDP improvement given ... greater cyclicality due to sector mix, and greater operating leverage stemming from lower margins."
RBC also wrote that earnings growth was expected to be 2.5 times faster for small names over large-cap stocks. "In our view, this divergence provides much greater upside for small companies."
(Editing by Lisa Von Ahn and Chizu Nomiyama)
