Why Morgan Stanley’s wealth CIO says it’s time to take profits in small-caps and meme stocks

The stock market is in a record-setting stretch over the last several months.

Small-cap stocks have joined the rally, but some experts remain unconvinced that the gains will continue.

Morgan Stanley’s Lisa Shalett sees an opportunity for investors to profit before the tides turn.

The summer rally to all-time highs has lifted everything from mega-caps to cheap stocks to meme shares, but the investment chief of Morgan Stanley’s wealth unit says it might be time to take some chips off the table.

There’s no overlooking the fact that this has been a strong run for small and mid-cap companies, including meme stocks, new and old.

Small and mid-cap stocks have rallied, with the Russell 20000 index gaining 15% in the past six months, outpacing the 13% gain for the S&P 500.

Despite this, some market pros see the end of the runway approaching. Lisa Shalett, the CIO of Morgan Stanley’s wealth management arm, thinks that now is an opportune time to take profits.

This week, Morgan Stanley’s Global Investment Committee had some advice for investors.

The team of analysts made it clear that they think the time has come to consider selling stocks in three specific sectors: small and mid-cap stocks, unprofitable tech firms, and popular meme stocks.

Shalett told Business Insider that, despite the momentum in small-cap stocks, investors would be best served to walk away now, as many hedge funds have already done.

In Shalett’s view, the momentum pushing the market forward can persist in the short term. However, she noted that next year will probably be significantly more difficult, particularly for small-cap companies.

“We think that the profitability, the public universe of small caps, is really inferior to the private market,” she told Business Insider.

Another concern Shalett raises is that small-cap companies may be unable to compete with technology at the necessary scale. “They’re probably not going to be able to invest in generative AI and compete at a rate that perhaps their larger cap brethren can,” she said.

While anticipation of the Fed’s upcoming September interest rate cut has helped fuel stock momentum recently, Shalett doesn’t think it will be enough to further boost small-cap companies.

“They need a lot more rate cuts than just 100 basis points, and we’re probably not going to get enough,” she said.

Shalett’s thesis on why investors should avoid popular meme stocks is similar, in part because many such companies fall under the small-mid cap size umbrella.