Raising R2 price target to 2400; it’s all priced in: We are raising our 2021 Russell 2000 price target to 2400 (from 2050), leaving limited upside from current levels. We are increasing our 2021 R2 (ex-Financials) EDITDA growth estimate incrementally higher to 35% (from 32%), factoring in the high optimism in the economic recovery but a lack of recent positive earnings surprises. Multiples are at all-time highs (20.6x), which we expect to moderate significantly (2021 projection: 16.25x), but we still expect them to remain elevated due to support by relatively low rates, fed support, and continued earnings recovery from trough levels. 

Economic recovery to drive small cap earnings higher, but no additional boost from earnings surprises. Strong gearing to an improving U.S. economy (higher leverage, improving margins) should disproportionately benefit small caps during the expected economic recovery this year. Increasing economic optimism (consensus 2021 U.S. GDP 7.1%) has pushed our Top-Down macro model projections for small cap 2021 EBITDA growth higher (+8.4% YTD), while an increase in consensus 2021 EBITDA growth has seen a more modest increase (+2.5% YTD). However, in contrast to large caps, the small cap EBITDA ‘surprise’ in 20Q2-20Q4 was weaker and FY21 consensus EBITDA estimates did not fall as sharply last year. This leaves little room for a “surprise catch-up” in small caps (consensus estimates rising to incorporate the ‘surprises’), which is our expectation for large cap earnings. Lastly, we believe that small cap EBTIDA growth will moderate in 2022 but remain strong (15-20%), well above the subdued levels seen from 2011 to 2019.