Bank of America Recommends Small-Cap Stocks

Bank of America has identified high-quality small-cap stocks as a potential hedge against increasing stock market volatility, particularly with a possible rate cut by the Federal Reserve on the horizon. Investors have shifted their focus to small-cap stocks, which are typically more reliant on domestic financing. The Russell 2000 index, representing small companies, has outperformed other major indices this quarter, rising over 5% since late June, despite a 4.3% decline in August, contrasting with a 1% increase in the S&P 500. In its analysis, Bank of America screened for small-cap stocks that are both high in quality and attractively priced, suggesting these stocks could appreciate and better withstand market fluctuations. High-quality stocks are defined by specific metrics, including return on equity, accruals ratio, and financial leverage ratio, as outlined in the S&P 500 Quality Index. Additionally, these stocks must show positive earnings revisions and low refinancing risk to mitigate potential impacts from wider credit spreads or unexpected Federal Reserve rate decisions. Among the stocks highlighted by Bank of America, several received buy or neutral ratings, with analysts projecting an average upside of nearly 19%. One notable company is set to report earnings on August 29, having seen its shares rise over 31% this year. Conversely, financial services firm StoneCo, down 23% year-to-date, is also on the list, with analysts suggesting a potential upside of nearly 29%.