Now is the time for a small-cap short-term trade: Wells Fargo By Investing.com

Investing.com — Current market conditions present a compelling opportunity for a short-term small-cap deal, Wells Fargo analysts said Monday.

According to the investment bank, a combination of a close US presidential race and favorable economic catalysts makes small-cap stocks particularly attractive in the short term.

Wells Fargo points to a “50/50” presidential race that creates significantly skewed returns for small caps, especially in the event of a Trump victory.

“Small caps have a positive expected relative return in the near term as the presidential race is essentially a coin toss (on RCP) with five weeks to go,” the analysts wrote.

“In our view, the estimated small-cap returns are skewed favorable, with significant short-term outperformance with a Trump win and limited underperformance with a Harris win,” they added.

Based on market behavior following the 2016 election and the July 2024 Trump assassination attempt, Wells Fargo anticipates a 5-10% small-cap performance within 1-3 months if Trump wins.

After the 2016 election, it rose 15.7% by the end of the year, compared to a 5% increase in . Similarly, following the July 2024 assassination attempt, the S&P 600 gained 6.4% to end the month, while the S&P 500 fell 1.6%.

Even in a scenario where VP Harris wins the presidency, Wells Fargo sees the downside to small caps as limited, projecting only a weak 2-3% performance. However, the report points out that Harris’ policies remain somewhat unclear, making precise forecasting more difficult.

Wells Fargo also points to broader macroeconomic factors, such as the Atlanta Fed’s estimated 3.1% GDP growth for Q3, which is higher than consensus estimates. The bank notes that in past instances where GDP has exceeded expectations, small caps have seen significant gains. The October 30 GDP report is seen as a potential catalyst for the small-cap segment.

In terms of market positioning, Wells Fargo advises investors to add small-cap exposure in anticipation of these tailwinds.

“It is time for a tactical shift to lower caps and some cyclicals related to relative performance, expected returns around the election and a possible GDP catalyst,” the analysts continued.

Long-term growth and mid-cap stocks remain Wells Fargo’s preferred risk-reward group.