"Although the Russell 2000 has just made another new all-time high, we confess that we still can't quite get comfortable with the move we've seen," said Lori Calvasina, small cap strategist at Credit Suisse. "To get more bullish, we need to see more evidence that the economy and earnings are poised to re-accelerate in the back half of the year."
In fact, the index already has breached the 950 target that Credit Suisse had slapped on the group this year. Calvasina had conceded that the Russell 2000 could hit 1,025 at some point before pulling back, but even that lofty target has fallen.
Credit Suisse uses six barometers to test the space, and only two are positive—investor sentiment and retail money flow.
Once the 1,025 mark hit, Calvasina said, "We had doubts such a move could be sustained through year end since we suspected that valuation pressures might return once that level was achieved. That valuation test we have been anticipating is also occurring now."
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Valuation has passed 17 times earnings, and with profit outlook weak the ability of small-caps to gain at such high levels looks suspect.
A Credit Suisse investor survey for the first half showed just 18 percent found valuations to be compelling at these levels, despite a majority feeling bullish about the space over the long term.
"We think the lack of valuation appeal may have an impact on the appetite of long-only small cap investors, as those spending more time than usual looking for new ideas fell to 35 percent from 52 percent," Credit Suisse said in a narrative that accompanied the survey.
The firm advises investors to use caution.
(Read more: What you need to know about earnings (so far))
Credit Suisse is overweight industrials and durable goods producers, and has raised tech to overweight after a cut in May.