BofA expects mid to outperform small stocks in the H2

Investing.com -- Bank of America has shifted its preference within small and mid-cap equities for the second half of 2026, moving to favor mid-caps over small-caps after the Russell 2000 surged 21% in the first half, the best performance of any size index.

In a note, analyst Jill Carey Hall said that while they "still prefer SMID over mega," the case for small-cap outperformance has diminished heading into the second half.

The bank cited the increased risk of Federal Reserve rate hikes as the key differentiator, estimating that "every 25 basis points hike is a roughly 2% hit to Russell 2000 operating earnings."

BofA's economists now expect 75 basis points of hikes this year, with 25 basis points in each of September, October and December, with the Fed on hold in 2027. Small caps carry the most refinancing risk in that scenario, the bank warned.

Mid-caps now trade at similar valuations to small-caps, with comparable expected second-half earnings accelerations, but BofA said mid-caps have "the strongest guidance and revision trends," tipping the balance in their favor.

BofA prefers Value over Growth, noting it typically leads during earnings recoveries and remains cheap relative to Growth in both small and mid-cap segments.

The bank also urged investors to tilt toward Quality within small caps, where low-quality outperformance recently hit a three standard deviation extreme, "close to February 2000 levels."

Leveraged stocks with refinancing risk were flagged as names to avoid.

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