BNY Mellon: Large Cap Stocks Poised to Outperform Small Caps

"When we updated our calculations in January, once again large caps appear to be significantly undervalued compared with small caps," Keleher said.  "The last time the valuations metrics sent such a strong signal was in June 1983, and over the following decade the Standard & Poor's 500 on average returned 10.4% annually, easily outperforming the Russell 2000, which returned an average of 6.5% annually over the same period."

The study in June 2010 and the updated review in January 2011 calculated expected returns for small cap and large cap stocks in the United States and other developed global markets by examining the current price of individual securities, consensus earnings expectations over the next few years, and the long-term growth rate for the gross domestic product for the countries in which each company is based.

Transaction costs are estimated to be approximately 14 basis points higher for U.S. small caps compared with U.S. large caps and even higher in other global developed markets.   Turnover also tends to be higher in small cap indexes and small cap active portfolios than their counterparts at large cap indexes and large cap active portfolios, which will increase the odds of large cap outperformance, according to BNY Mellon Beta Management.  

"The relative attractiveness between large cap and small cap stocks varies over time, and small caps had a great run for the last few years," Keleher said.  "However, the tide appears to have turned in favor of large caps."

Read about BNY Mellon and subsidiary Pershing's fourth-quarter 2010 earnings at AdvisorOne.com.