Finance

Bank of America Merrill Lynch is changing the way it looks at small caps.

The firm’s senior U.S. equity strategist Jill Carey Hall is turning bullish on the troubled group.

But her new call comes with a catch: Investors need a ten year time horizon to see solid profits.

“If you look at the valuation of small caps, they’ve certainly come down relative to large [caps],” she said Thursday on CNBC’s’ “Futures Now.”

Despite her fresh optimism, Hall is discouraging medium and shorter-term investors from buying small caps because they’re still facing challenges. She points out macro indicators such as ISM U.S. manufacturing PMI haven’t bottomed yet.

“Small caps are still in an earnings recession right now,” said Hall.

She questions whether Wall Street is warming up to the battered stocks too quickly. 

“Expectations for next year look quite aggressive,” said Hall. “Analysts are still forecasting that small caps go from seeing flattish earnings growth this year to somewhere between 15 and 20% earnings growth next year, and the guidance has still been pretty weak.”

The Russell 2000 , which consists of small caps, just completed its best week since Dec. 9, 2016. The index has jumped almost 5% over the past five sessions and is now up 17% so far this year. However, it’s still off more than 9% from its all-time high hit in the summer of 2018.

Yet, Hall reiterates a bullish tide should lift the stocks.

“The relative multiple of the Russell 2000 versus the Russell 1000 is now at its lowest levels in 17 years,” Hall said. “While valuations aren’t usually that predictive of a measure over the short-term, they do tend to matter a lot if you’re a long-term investor.”

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