Investors Haven't Loved Small Caps So Much in Nearly 3 Years. But Could This Be Too Optimistic?

Small caps have been all the rage on Wall Street over the past two months.

In fact, according to Bank of America's latest fund managers survey, investors haven't been this bullish on small caps in almost three years.

The survey conducted from Jan.5-11 showed investors see large-cap companies underperforming small-cap companies in the next 12 months for the first time since June 2021.

Source: Bank of America

Wall Street strategists believe the group of stocks - which investors often track by proxy using the Russell 2000 Index- has become increasingly attractive as the prospect of lower interest rates in the year ahead grows.

Source: Bloomberg

Lori Calvasina at RBC Capital Markets has also been recommending small-cap stocks for months, much of Calvasina's case for why small caps could outperform remains intact. But a key part of Calvasina's call, that small caps had been oversold, has flipped amid the recent market rally.

In late October of last year, the Russell 2000's RSI dropped to 30, showing it was oversold, but by mid-December, it had jumped above 80, tipping into the overbought zone.

Source: MooMoo

Notes: RSI1, RSI2, and RSI3 correspond to the 6th, 12th, and 24th respectively.

This has Calvasina "concerned" about how popular small caps have become.

"In December it felt like everyone we met with (including the many varieties of investors who are not focused on Small Cap investing) wanted to talk about Small Caps and was constructive on them," Calvasina wrote in a note.

She added, "We can't remember the last time this happened."

Source: Bank of America, Yahoo Finance, MooMoo, Bloomberg