Small-caps beyond 50bp rate cut need improving fundamentals to grip leadership role: BofA

seekingalpha09-19

The big September swipe down in interest rates by the Federal Reserve is a positive move for small-cap stocks, but fundamentals need to be better for that cohort to sustain a leadership role in the ...

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The Fed on Wednesday jumpstarted its new easing cycle with a cut of 50 basis points, larger than the standard 25bp reduction. The fed funds rate stands at 4.75%-5%, and policymakers project further reductions.  “More cuts are an incremental positive for small caps given their rate sensitivity/refinancing risk, and bigger cuts help stem growth concerns. But we still believe that improvement in small-cap fundamentals is necessary for sustained small-cap leadership to resume,” Jill Carey Hall, BofA’s head of U.S. small/mid-cap strategy, said in a note Thursday, pointing out that more than 40% of small-cap debt is short-term or floating rate.  The Russell 2000 Index (RTY) of small-caps rallied in July on refreshed rate-cut optimism before pulling back. It was up +2% during Thursday’s action. After the rate cut Wednesday, the index had climbed more 2%, outstripping moves in large-caps (SP500)(COMP:IND)(DJI), but eventually ended down about 0.1%.  Hurdles for small-caps include earnings in recession, down -10% Y/Y in Q2, and guidance below consensus estimates, Hall said. Also, the macro picture is weakening while Q4 expected earnings growth is being cut, to +15% vs. +30% expected earlier in 2024.  BofA is staying tactically cautious on small-caps vs. large-caps and favors mid-caps. In small-caps, it favors Value over Growth as the former style contains more high-quality stocks, the strategist said. Small-caps tend to outperform large-caps in the six months after a first interest rate cut, and have a mixed performance over 12 months, Hall said.  The Russell 2000 (RTY) has risen +10% YTD and the S&P 500 (SP500) has charged up 19.6%.  Here are some small-cap ETFs: (NYSEARCA:IWM), (IJR), (VB), (SPSM), and (DFAS). Some mid-cap ETFs: (IJH), (VO), (IWR), (VOT), and (IJJ). More on the markets","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.2","shortVersion":"4.29.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2468583501"}