Top small cap strategist sees the shares jumping 9% in the next year on the strong economy

Published Sun, Dec 5 20218:31 AM EST

Wall Street's small-cap guru sees the benchmark rising more than 9% in 2022 as a growing economy lifts smaller stocks. Jefferies' small-cap strategist Steven DeSanctis expects gross domestic product to rise more than 4% next year and interest rates to increase. As a result, the Russell 2000 will gain roughly 9% in the next year, reaching the 2,350 level, he expects. "We see small beating large," DeSanctis told clients. "We have continued to prefer Value, Cyclicals, better ballast across market cap, along with quality, and these themes are NOT changing heading into '22." The Russell 2000 is up 9% this year, but well off its peak in early November. The small-cap benchmark is down more than 11% in the past month on fears about covid waves, variants and supply chain bottlenecks. The new Covid variant omicron is small-caps' short-term hurdle and DeSanctis said if omicron is a repeat of the Delta variant, small will struggle over the next few months. But in the new year, strong GDP and earnings growth, as well as potential rate hikes from the Federal Reserve, should position small stocks for outperformance over large, according to Jefferies. The Russell 2000 is full of the most economically sensitive names, so when the economy is flourishing, usually small-caps are as well. "We feel that [small cap] earnings growth will be strong, up 17.5%, and stocks follow earnings. Earnings will be strong due to an economy that should grow above 4%," said DeSanctis. What to own in the new year Jefferies is once again overweight industrials, materials, health care and financials in 2022. The Wall Street firm is adding consumer staples to its overweight bucket for 2022, as the group has become cheaper and hold up well in front of rates hikes. DeSanctis also said staples' earnings and sales revisions have bottomed. The small-cap strategist is sticking with his recommendation towards foreign over domestic stocks, but he now prefers the Asia region over Europe. "The Omicron variant may slow this region's economic growth heading into '22, and it is not as cheap as Asia," he added. Jefferies is market weight energy, utilities and real estate and underweight technology, consumer discretionary and communication services. — with reporting from CNBC's Michael Bloom.

Traders work on the floor of the New York Stock Exchange (NYSE) at the start of trading on Monday following Fridays steep decline in global stocks over fears of the new omicron Covid variant discovered in South Africa on November 29, 2021 in New York City.

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Wall Street's small-cap guru sees the benchmark rising more than 9% in 2022 as a growing economy lifts smaller stocks.