The current turbulent market has hurt small-cap stocks.

“Small caps have generally lagged over the last several weeks and we think this trend will continue, due to both rising volatility and widening credit spreads—which is the difference between high-yield bonds and U.S. Treasuries. We have also started to see outflows from small-cap mutual funds and this too tends to hurt overall performance within the group,” according to commentary by Steven DeSanctis, head of Small-Cap Strategy at Merrill Lynch.

He believes there is now a swing back to large companies and large-cap stock.

However, DeSanctis points out that over the longer term, an allocation to U.S. small-cap stocks makes sense. Performance is typically better down the market cap spectrum over longer holding periods, and smaller stocks tend to beat larger ones more often than not, just not in the current market.

“Since the March 2009 market lows, the smallest companies and those not expected to earn money have been outperforming. We think this rally in lower quality is getting long in the tooth and valuations are not as compelling for these stocks as they once were. We have also started to see earnings estimates fall, not rise, as they had been doing for about a year. This also tends to signal a transition from lower quality to higher quality and from small caps back to large caps,” according to DeSanctis. “We recommend staying with higher-quality, size and growth during this turbulent period.”