Wall Street's No. 1 small-cap strategist hasn't been this bullish in years, sees 12% gain in 2021

Published Tue, Dec 1 202010:18 AM ESTUpdated Tue, Dec 1 202011:50 AM EST

(This story is for CNBC Pro subscribers only.) Wall Street small-cap market guru Steven DeSanctis is giving his most bullish forecast for the group in over a decade. The Jefferies analyst estimates that benchmark Russell 2000 will rise more than 12% to top the 2,050 level in 2021. Next year's call is Jefferies' most bullish for the index since 2003. Jefferies expects small caps to outperform large caps by 6.4% next year, which would be the first time small caps do better than large caps since 2016. "Valuations are very attractive, earnings, sales accelerating faster down cap, and we see M & A picking up, all boosting the size segment," DeSanctis told clients. "We head into '21 with a Value/Cyclical tilt with two favorite sectors being [Industrials and Materials}." Small-caps just notched their best month on record in November as positive vaccine developments pushed investors into beaten-down segments of the economy. The Russell 2000 gained 18.29% in November for its best month since its inception in 1984. DeSanctis said the group of mostly cyclical stocks is poised for a strong 2021. An acceleration in GDP and a pickup in M & A activity are pointing to a year of outperformance for the small and mid-sized companies. Jefferies sees a 4% pickup in GDP next year, which is historically bullish for small stocks which snap back the hardest during times of economic recovery. The firm expects small-cap earnings to grow 40% in 2021, based on data from past rebounds from other recessions. While the firm sees earnings and sales starting to accelerate faster for small caps than for large, Jefferies said the small stocks have not been rewarded in their share price. "Macro backdrop improving, in a jagged fashion, this certainly helps small caps," said DeSanctis, who is also a mid-cap strategist. "We see the dollar losing more of its luster, and that boosts small caps." Pullback is possible first DeSanctis said coming off the best month ever for small caps, he wouldn't be surprised to see a 5% to 10% pullback in the Russell 2000 before the 2021 rally begins. However, next year's outperformance is sure to be choppy, DeSanctis has previously told CNBC, with the group never quite garnering the "euphoria" that large-cap technology darlings receive. "Given November was the best month ever for the Russell 2000, lots of stocks are extended and thus 'the pause that refreshes' is needed, in our opinion," said DeSanctis. Heading into the new year, Jefferies is overweight the industrial and materials sectors. The firm also recommends health care and real estate stocks. Jefferies is market weight energy, financials, tech and utilities and underweight discretionary, communication services and staples. Top stock picks for 2021 Last month, Jefferies made a list of buy-rated small- and mid-cap stocks that it expects will see better sales growth in 2021. All the listed companies have had upward earnings and sales revisions and trade at below-market multiples. — with reporting from CNBC's Michael Bloom.

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(This story is for CNBC Pro subscribers only.)

Wall Street small-cap market guru Steven DeSanctis is giving his most bullish forecast for the group in over a decade.

The Jefferies analyst estimates that benchmark Russell 2000 will rise more than 12% to top the 2,050 level in 2021. Next year's call is Jefferies' most bullish for the index since 2003.

Jefferies expects small caps to outperform large caps by 6.4% next year, which would be the first time small caps do better than large caps since 2016.