Large cap stocks are typically seen as safe bets in periods of volatility, but a slew of Wall Street pros believe that small caps look increasingly attractive as recession risk increases. Small-cap stocks have often received less love compared to their larger counterparts, given perceived earnings volatility, greater domestic bias and lower visibility. They are also often shunned during market volatility in favor of more stable options. But history suggests that investors may be wrong. “Historically, recessions have often been good buying opportunities for small caps,” Lori Calvasina, head of US equity strategy at RBC Capital Markets, said in a July 22 note. “It also seems to us that small caps are already suffering a lot of economic pain.” The brokerage believes that small-cap stocks are “very close” to pricing in a recession, which is “pretty clear” in valuations. It noted that small-cap stocks now look historically cheap compared to large-cap counterparts, with the small-cap Russell 2000 Index trading at a price-to-earnings ratio “tending to its bottom.” According to Christian Galipeau, senior market strategist at Putnam Investments, small caps not only perform better in a recession, but also over a longer period of time after an economy has emerged from a recession. He noted that small-cap stocks tended to underperform large-cap stocks in the months leading up to and during a recession, as well as “for the next three years” when the economy comes out of recession. Citigroup noted that small caps were the first to weaken as inflationary pressures hit, and in turn may be the first to recover now. It said the valuations of small-cap stocks imply that they are “significantly less risky,” and that pricing is amid fears of a recession. “Small vs. big cap trading is near post-financial crisis lows and relative valuations are not far from their 20-year bottom,” Citigroup strategists, led by Scott Chronert, wrote in a note from July 26. Bank of America’s Best Stock Ideas Bank of America says “much has changed” since the start of this year, given a few developments: Fed policy, geopolitics, market volatility, rampant inflation and fears of a recession. “But volatility and regime changes present opportunities, and we continue to see a favorable backdrop for stock selection,” Bank of America strategist Jill Hall wrote in a recent report. It noted that stocks with defensible margins and pricing power have been rewarded in an environment of rising interest rates and inflation. The bank likes food delivery company DoorDash, which it says is not directly exposed to commodity and food price inflation given its position as a third-party platform. The bank has a price target of $90 for the stock, which closed Monday at $72, representing a potential 20% gain. Bank of America also likes Illinois-based Option Care Health as the name least exposed to labor cost pressures. The company could see even more profit if it implements improved free cash flow, Hall said. The bank’s price target of $38 for the stock implies a potential gain of 11.8% from the stock’s closing price of about $34 on Monday. Read more Has the market bottomed out? Here’s what Wall Street has to say after US stocks rebounded in July. Is the US in a recession? This strategist monitors 14 indicators. Top tech analyst says this FAANG stock is at an ‘inflection point’ – giving it a 33% rise, Florida-based electronics manufacturer Jabil also made the list. The company is being deployed to end markets that are showing secular growth, as well as sectors such as healthcare, which the bank considers “generally recession-proof.” Shares closed at about $59 on Monday, marking a 40% increase from the bank’s price target of $82 for the stock. Bank of America also likes chipmaker ON Semiconductor, for its strong reversal potential, superior product and exposure to hyper-growth trends in electric vehicles. The bank has assigned a price target of $80, which represents a potential 25% increase from the stock’s closing price of approximately $64 on Aug. 1. offers the potential for superior risk-adjusted returns. The bank’s picks include cybersecurity firm CyberArk, biopharmaceutical company Sarepta Therapeutics, and homebuilder Skyline Champion.