The Tell: Small-caps—a stock leader of 2018—has been downgraded by Morgan Stanley

Is one of the strongest segments of the U.S. stock market in 2018 about to turn?

Morgan Stanley on Monday downgraded its view on small-capitalization stocks to underweight, writing that recent gains in the category, particularly relative to its large-cap counterparts, had been overdone. It added that if investors move to more defensive parts of the market—as the investment bank suspects they will—the group’s recent uptrend could come to a halt, with a decline that amounts “to more than just a consolidation.”

Small-cap stocks have rallied in 2018, with the gains particularly pronounced in the past several months as broader equities have been pressured by growing tensions between the U.S.

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