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Analyst Says Small Cap Stocks Can't Meet Lofty Expectations

Jack Ablin, chief investment officer for Harris Private Bank, told CNBC’s “Squawk on the Street” that investors might consider going long in S&P 100 stocks and shorting the Russell 2000.

“If we look at large cap vs. small, which is a good proxy for quality vs. lower quality, the relative P/E ratio of the large vs. the small is as wide as it’s been since 1997, just before the large cap substantially out-performed the small caps,” Ablin said Monday.

He said small cap stocks now have unreasonably high expectations.

“We all know that earnings expectations for large cap stocks are low – something like 2% or 3% for the first quarter and maybe 6% -- at best -- all year,” he said. “The expectation for earnings growth on the Russell 2000 is over 18%. I don’t see an environment where large cap stocks earn 5%, 6% or 7% and small caps earn 18% to 20%.”

He likes the healthcare, staples and finance sectors.

“It’s still a little early for technology,” Ablin said. “We like an environment where you see steady, improving growth and low inflation. That’s not what we have right now. We think it’s early for technology. Remember that tech has absolutely no pricing power.”