Signs of cracks in small-cap armor?

Small-company stocks clobbered large-caps in the performance derby last year and have taken an early lead in 2014. But small-fry stocks are starting to exhibit "some cracks in the armor," Steven DeSanctis, small-cap strategist at Bank of America Merrill Lynch, warned clients in a research note.

Why the sudden angst?

The Russell 2000, an index of small-cap stocks, was a market leader in 2013, posting a gain of 37%, outpacing the 29.6% return of the large-company Standard & Poor's 500-stock index. But despite a narrow performance lead this year, storm clouds are forming for small stocks.

Warning signs include:

Pricey shares. "Valuations reflect a lot of good news," said DeSanctis, noting that the price-to-sales metric for the Russell 2000 is "hitting a new all-time high."

What's more, when small caps are expensive from a price-to-earnings standpoint, which they now are, they "tend to deliver below-average performance and trail large-cap stocks by almost 5 percentage points.

Profit estimates are falling. "We have started to see 2014 estimates take a tumble," he wrote. In the last month, the earnings growth rate for 2014 has declined to 17.8% from 20.1%, BofA research shows.

Cash is exiting the space. Last year $18.7 billion flowed into small-cap funds, but so far this year $1.5 billion has flowed out, BofA says. Outflows can provide a "headwind," DeSanctis said.