<div>Investing.com — Recent declines in the Russell 2000 suggest that some geopolitical risk may already be reflected in small-cap valuations, though additional downside could emerge if global tensions escalate, according to Bank of America Global Research. [[pro_promotion | Get premium news and insight by upgrading to InvestingPro ]] BofA noted that historically the Russell 2000 has fallen about 8% on average and 11% at the median during major macro or geopolitical shocks, compared with the roughly 4% month-to-date decline currently seen, indicating that markets may have partially, but not full, priced in geopolitical risks. However, the bank added that small caps have typically recovered within about three months after such shocks, suggesting that geopolitical-driven drawdowns tend to be temporary rather than structural. From a valuation perspective, small caps remain historically inexpensive relative to large caps, trading at a relative forward P/E of about 0.78x versus the Russell 1000, which is still below the long-term average. BofA also highlighted that small-cap energy stocks could benefit if geopolitical tensions push oil prices higher or increase stagflation risks. The sector has historically shown the strongest correlation with crude prices and has been one of the best performers during stagflationary periods, while currently trading among the cheapest small-cap sectors relative to history. More broadly, the bank continues to favor Value over Growth within small and mid caps, noting that value stocks have historically outperformed during periods of rising inflation and economic recovery phases. Over the long run, valuations suggest the Russell 2000 could deliver roughly 8% annualized returns over the next decade, outperforming the roughly 2% expected for large-cap stocks, BofA said.</div>

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Recent declines in the Russell 2000 indicate that some geopolitical risks may be reflected in small-cap valuations, though further declines could occur if global tensions rise, according to Bank of America Global Research. Historically, the Russell 2000 has averaged an 8% decline during major geopolitical shocks. Small caps are currently trading at a relative forward P/E of 0.78x compared to large caps. BofA favors Value over Growth in small and mid caps, predicting the Russell 2000 could deliver 8% annualized returns over the next decade, outperforming large-cap stocks.

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Russell 2000: Are geopolitical risks priced in?