US small-cap stocks gain momentum compared to larger peers

US small-cap stocks gained more than their larger peers in June as investors bet on the strength of the domestic economy, but analysts cautioned that the impact of the Federal Reserve’s rate hike was widely overstated. can be felt.

The Russell 2000 index of small-cap companies, often regarded as a bellwether for macroeconomic expectations, has risen more than 8 percent this month, reaching its highest level since the US regional banking crisis in March. And trailed the S&P’s strong gains. 500 and the Nasdaq Composite over the same period.

The S&P and Nasdaq gained 5.9 percent and 6.5 percent, respectively.

The move comes on the back of this year’s rally in US blue-chip equities, as gains in artificial intelligence-related stocks pushed Wall Street’s benchmark indices to their highest levels in more than a year. The S&P 500 is back in bull market territory, enticing investors to jump into small-cap companies.

“Eventually people start to look outside of those led stocks and think, If this rally has legs, where will it go next?” said Steve Sosnik, chief strategist at Interactive Brokers.

Small-cap demand increased after economic data at the beginning of the month suggested the US labor market remained resilient due to the Federal Reserve’s aggressive monetary tightening.

According to analysts, the rise of the Russell 2000 is also a sign that investors are recovering from the March US banking crisis. Bank stocks are the third-heaviest weighting in the index after industry and healthcare.

“Seeing the index gain support suggests we are finally moving past concerns that another bank-related headline is going to throw financial markets into a tailspin,” said Quincy Crosby, chief global strategist at LPL Financial.

However, some analysts said it was risky to bet on a sustained recovery for small caps as the full impact of rising borrowing costs is yet to unfold. In an effort to tame rising inflation, the Fed has raised its key rate from near zero 15 months ago to a range of 5 percent to 5.25 percent.

While the Fed ramped up its tightening on Wednesday, the central bank surprised investors by indicating it would raise rates twice before the end of the year to stamp out persistent inflation.

The consensus of analysts polled by Reuters suggests the US economy will enter recession in the second half of this year as higher borrowing costs begin to feed through to households and businesses.

In this environment, many expect small caps to sell first. Marija Weitman, senior multi-asset strategist at State Street Global Markets, said that, typically, “they find it much more difficult to obtain funds, they usually have very low cash balances and can’t protect themselves from tough times.” There are cushions”.

After its run-up, the Russell 2000 is trading at 24 times forward earnings this year, compared to 19 times for the S&P and 36 times for the Nasdaq.

“Obviously (small caps) are cheaper than large-cap tech, but if you look at the broader market we don’t think they are that cheap or under-owned,” said Amiel van den Heiligenberg, head of asset allocation Said. LGIM.

Yet the possibility of a hard landing remains, Van den Heiligenberg said, “being cautious on the (US stock) markets is quite a stressful exercise at the moment, when it goes up every day”.

“There is rarely a day when there is a negative return – which is what attracts people, because not making money when your neighbor is making money is very depressing for many people.”

US small-cap stocks gained more than their larger peers in June as investors bet on the strength of the domestic economy, but analysts cautioned that the impact of the Federal Reserve’s rate hike was widely overstated. can be felt.

The Russell 2000 index of small-cap companies, often regarded as a bellwether for macroeconomic expectations, has risen more than 8 percent this month, reaching its highest level since the US regional banking crisis in March. And trailed the S&P’s strong gains. 500 and the Nasdaq Composite over the same period.

The S&P and Nasdaq gained 5.9 percent and 6.5 percent, respectively.

The move comes on the back of this year’s rally in US blue-chip equities, as gains in artificial intelligence-related stocks pushed Wall Street’s benchmark indices to their highest levels in more than a year. The S&P 500 is back in bull market territory, enticing investors to jump into small-cap companies.

“Eventually people start to look outside of those led stocks and think, If this rally has legs, where will it go next?” said Steve Sosnik, chief strategist at Interactive Brokers.

Small-cap demand increased after economic data at the beginning of the month suggested the US labor market remained resilient due to the Federal Reserve’s aggressive monetary tightening.

According to analysts, the rise of the Russell 2000 is also a sign that investors are recovering from the March US banking crisis. Bank stocks are the third-heaviest weighting in the index after industry and healthcare.

“Seeing the index gain support suggests we are finally moving past concerns that another bank-related headline is going to throw financial markets into a tailspin,” said Quincy Crosby, chief global strategist at LPL Financial.

However, some analysts said it was risky to bet on a sustained recovery for small caps as the full impact of rising borrowing costs is yet to unfold. In an effort to tame rising inflation, the Fed has raised its key rate from near zero 15 months ago to a range of 5 percent to 5.25 percent.

While the Fed ramped up its tightening on Wednesday, the central bank surprised investors by indicating it would raise rates twice before the end of the year to stamp out persistent inflation.

The consensus of analysts polled by Reuters suggests the US economy will enter recession in the second half of this year as higher borrowing costs begin to feed through to households and businesses.

In this environment, many expect small caps to sell first. Marija Weitman, senior multi-asset strategist at State Street Global Markets, said that, typically, “they find it much more difficult to obtain funds, they usually have very low cash balances and can’t protect themselves from tough times.” There are cushions”.

After its run-up, the Russell 2000 is trading at 24 times forward earnings this year, compared to 19 times for the S&P and 36 times for the Nasdaq.

“Obviously (small caps) are cheaper than large-cap tech, but if you look at the broader market we don’t think they are that cheap or under-owned,” said Amiel van den Heiligenberg, head of asset allocation Said. LGIM.

Yet the possibility of a hard landing remains, Van den Heiligenberg said, “being cautious on the (US stock) markets is quite a stressful exercise at the moment, when it goes up every day”.

“There is rarely a day when there is a negative return – which is what attracts people, because not making money when your neighbor is making money is very depressing for many people.”