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All Eyes on Fed Decision: Will Small-Caps Finally Take the Baton?
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It’s hard to believe that this newest bull market is nearly two years old. It seems like just yesterday we were talking about the 2022 bearish downturn amid a 40-year high in inflation. And as much heat as the Fed took for failing to act quickly enough to combat high prices, inflationary measures have gradually trended back toward their long-term target.
The Fed is about to cut its benchmark policy rate for the first time in more than four years. Markets have been pricing in an anticipated series of cuts for some time. As this bull evolves and takes the next step in its progression, we’ve started to see large-cap tech lag and rate-sensitive areas assume the driver’s seat as the rally broadens out.
This is a healthy and necessary rotation in terms of the sustainability of this new bull market. It makes sense when we think about it; as inflation softens, markets gain confidence in upcoming interest rate cuts.
Lower yields tend to help small-cap stocks gain traction, which are generally more interest-rate sensitive. Since these companies typically have a higher cost of borrowing, declining yields serve as a tailwind moving forward.
Small-Caps Gearing Up Ahead of Fed Announcement
The central bank has made it clear that it intends to cut rates slowly, remaining data dependent amid a resilient economy. This should be music to our ears, with forward returns for stocks quite appealing from a historical perspective.
There’s no doubt that small-caps have lagged throughout this latest bull market. The Russell 2000 – a group of stocks with $2 billion and under in market value – is a good gauge to use for these companies.
The group began to perk up heading into this week’s rate announcement, with the iShares Russell 2000 ETF (IWM - Free Report) climbing about 12% from the August low (on an intraday basis). It’s almost as if these stocks were trying to tell us something.
And they were. As we can see below, on a forward 3-month, 6-month, and 12-month basis, small-caps have outperformed both their mid- and large-cap counterparts following the first rate cut of a new cycle (with data going back to 1950):
Image Source: Zacks Investment Research
Of course, every rate-cut cycle is slightly different. This time around, the Fed initiated the first cut with the major US indices near all-time highs, not to mention substantial gains from the bottom of the 2022 bear market along with a looming presidential election.
But let’s keep in mind, what is the market’s primary concern? Earnings. And earnings-per-share growth expectations for small-cap companies are rising, with analysts anticipating that Russell 2000 constituents will grow at a persuasively faster rate than the S&P 500 in the coming quarters:
Image Source: Zacks Investment Research
In addition, small-cap valuations remain fairly attractive relative to large-caps. Adding small-cap exposure to portfolios provides another opportunity for diversification as well.
Remember that these charts don’t predict anything about this cycle. They’re meant to demonstrate a wide range of potential outcomes so that readers aren’t led astray, particularly with all the noise out there from the financial media.
Leading Small-Cap Stock Surges
CommScope (COMM - Free Report) is a global provider of infrastructure solutions for communications, data center, and entertainment networks. The company recently collaborated with Nokia (NOK - Free Report) to develop a cutting-edge, AI-driven solution for deploying seamless in-building and campus-wide connectivity. CommScope has created a niche market for itself, helping customers scale network capacity, deliver better network response time, and simplify technology migration.
COMM stock was rated a Zacks Rank #1 (Strong Buy) and #2 (Buy) for much of this year before recently being placed with a Hold rating. The stock trades at just 5.8 times forward earnings and has surged more than 500% in just the past 5 months:
Image Source: StockCharts
Analysts covering the premier infrastructure provider have been raising earnings estimates across the board. Looking at the full year, EPS estimates have soared 1,733% in just the past 60 days. The Zacks Consensus Estimate now stands at $0.98 per share, reflecting a 53% growth rate relative to last year.
Image Source: Zacks Investment Research
All Eyes on the Fed
An interest rate cut is all but assured from the Fed later today. There’s been plenty of attention from the financial media regarding whether or not we’ll see a 25-basis point or 50-basis point cut.
And while I think the FOMC will err on the side of caution with the former, the decision doesn’t matter as much as the path of cuts from here. Markets are pricing in around 200-basis points of cuts over the next 12 months.
Investors will be keeping a close eye on small-caps amid the first cut in more than four years. Make sure to take advantage of all that Zacks has to offer to uncover leading stocks like COMM.
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All Eyes on Fed Decision: Will Small-Caps Finally Take the Baton?
It’s hard to believe that this newest bull market is nearly two years old. It seems like just yesterday we were talking about the 2022 bearish downturn amid a 40-year high in inflation. And as much heat as the Fed took for failing to act quickly enough to combat high prices, inflationary measures have gradually trended back toward their long-term target.
The Fed is about to cut its benchmark policy rate for the first time in more than four years. Markets have been pricing in an anticipated series of cuts for some time. As this bull evolves and takes the next step in its progression, we’ve started to see large-cap tech lag and rate-sensitive areas assume the driver’s seat as the rally broadens out.
This is a healthy and necessary rotation in terms of the sustainability of this new bull market. It makes sense when we think about it; as inflation softens, markets gain confidence in upcoming interest rate cuts.
Lower yields tend to help small-cap stocks gain traction, which are generally more interest-rate sensitive. Since these companies typically have a higher cost of borrowing, declining yields serve as a tailwind moving forward.
Small-Caps Gearing Up Ahead of Fed Announcement
The central bank has made it clear that it intends to cut rates slowly, remaining data dependent amid a resilient economy. This should be music to our ears, with forward returns for stocks quite appealing from a historical perspective.
There’s no doubt that small-caps have lagged throughout this latest bull market. The Russell 2000 – a group of stocks with $2 billion and under in market value – is a good gauge to use for these companies.
The group began to perk up heading into this week’s rate announcement, with the iShares Russell 2000 ETF (IWM - Free Report) climbing about 12% from the August low (on an intraday basis). It’s almost as if these stocks were trying to tell us something.
And they were. As we can see below, on a forward 3-month, 6-month, and 12-month basis, small-caps have outperformed both their mid- and large-cap counterparts following the first rate cut of a new cycle (with data going back to 1950):
Image Source: Zacks Investment Research
Of course, every rate-cut cycle is slightly different. This time around, the Fed initiated the first cut with the major US indices near all-time highs, not to mention substantial gains from the bottom of the 2022 bear market along with a looming presidential election.
But let’s keep in mind, what is the market’s primary concern? Earnings. And earnings-per-share growth expectations for small-cap companies are rising, with analysts anticipating that Russell 2000 constituents will grow at a persuasively faster rate than the S&P 500 in the coming quarters:
Image Source: Zacks Investment Research
In addition, small-cap valuations remain fairly attractive relative to large-caps. Adding small-cap exposure to portfolios provides another opportunity for diversification as well.
Remember that these charts don’t predict anything about this cycle. They’re meant to demonstrate a wide range of potential outcomes so that readers aren’t led astray, particularly with all the noise out there from the financial media.
Leading Small-Cap Stock Surges
CommScope (COMM - Free Report) is a global provider of infrastructure solutions for communications, data center, and entertainment networks. The company recently collaborated with Nokia (NOK - Free Report) to develop a cutting-edge, AI-driven solution for deploying seamless in-building and campus-wide connectivity. CommScope has created a niche market for itself, helping customers scale network capacity, deliver better network response time, and simplify technology migration.
COMM stock was rated a Zacks Rank #1 (Strong Buy) and #2 (Buy) for much of this year before recently being placed with a Hold rating. The stock trades at just 5.8 times forward earnings and has surged more than 500% in just the past 5 months:
Image Source: StockCharts
Analysts covering the premier infrastructure provider have been raising earnings estimates across the board. Looking at the full year, EPS estimates have soared 1,733% in just the past 60 days. The Zacks Consensus Estimate now stands at $0.98 per share, reflecting a 53% growth rate relative to last year.
Image Source: Zacks Investment Research
All Eyes on the Fed
An interest rate cut is all but assured from the Fed later today. There’s been plenty of attention from the financial media regarding whether or not we’ll see a 25-basis point or 50-basis point cut.
And while I think the FOMC will err on the side of caution with the former, the decision doesn’t matter as much as the path of cuts from here. Markets are pricing in around 200-basis points of cuts over the next 12 months.
Investors will be keeping a close eye on small-caps amid the first cut in more than four years. Make sure to take advantage of all that Zacks has to offer to uncover leading stocks like COMM.