US SMALL/MIDCAPS-A year-end rally for small caps?

NEW YORK, June 19 (Reuters) - Mid- and small-cap stocks rose on Tuesday, rallying with the wider market on hopes for more stimulus from central banks, and as one group of analysts said they were expecting a late-year rally in the sector to reverse recent losses.

Sector analysts at Bank of America Merrill Lynch are sticking to their estimate of an 11.5 percent return for the Russell 2000 index this year, and say that despite recent weakness 2012 should look more like 2010, when a sizable rally at the end of the year produced strong gains in equities.

The analysts cite a number of factors in favor of small caps, such as reduced exposure to foreign earnings and below-average valuation.

"One of the reasons we think this year looks more like 2010 than 2011 is valuations," the analysts said in a research note. "With the recent pullback in performance, we estimate the Russell 2000 forward (price-to-earnings ratio) stands at 14.1 and is now below its long-term average."

The forward P/E ratio is a widely used measure of how expensive stocks are. It indicates how much investors are willing to pay for one dollar of expected earnings. The higher the number the more expensive a stock.

Investors were seeing that value in the market on Tuesday. The S&P MidCap 400 index rose 1.1 percent while the S&PSmallCap 600 index jumped 1.8 percent. In comparison, the benchmark S&P 500 rose 1 percent.

The overall market was driven by hopes the Federal Reserve, which began a two-day policy meeting on Tuesday, will agree to extend stimulus measures as the economy struggles to recover and as Europe's debt crisis worsens. The Fed will release a policy statement at the close its meeting on Wednesday.

There were also hopes the European Union would use rescue funds to buy debt of crisis-stricken countries after British media reported that leaders at the Group of 20 summit being held in Mexico were close to a deal. A German official later denied the report.

On the day, the Russell 2000 index climbed 1.8 percent, bringing it to a gain of 6.1 percent for the year so far. It is down 7.1 percent, though, from its peak in March.

Barnes & Noble Inc reported lower-than-expected quarterly sales, hurt by discounts as its Nook e-reader business, which competes with Amazon.com's Kindle franchise. The shares fell 4 percent to $14.63

Zumiez Inc shares gained 4.5 percent to $41.16. The teen-focused retailer has agreed to buy Austria-based Blue Tomato for 59.5 million euros ($75 million) to beef up its sports goods offering in Europe. It also raised its second-quarter revenue outlook.

Jefferies Group Inc, the investment bank, posted a second-quarter profit that beat muted Wall Street expectations, helped by a strong performance of its fixed-income business as investors sought safety in bonds. The shares fell 0.2 percent to $13.08.