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Investors have piled into small-cap stocks since the latest inflation report increased the odds of interest rate cuts by the Fed. Initially, there was a violent rotation, with investors selling the Magnificent Seven stocks, including the high-flying NVIDIA (NVDA - Free Report) , and buying into cheaper areas of the market.
The rally was accelerated by short covering by some hedge funds. It remains to be seen whether this is an inflection point for small caps or merely a technical move.
After years of underperformance, small caps now appear very attractively valued. The difference in valuations between the two groups is the widest it has been in over 20 years, according to some measures.
Small companies were previously hurt by recession worries and higher interest rates, as they are particularly sensitive to the economy. They generally have a higher debt burden, mostly at floating rates. Furthermore, they don't have access to the bond market.
On the other hand, mega-cap companies have huge cash reserves, and many of them refinanced their bonds to take advantage of low interest rates before the Fed began raising rates in 2022.
Small-cap stocks, which are domestically oriented, could also benefit from a Trump presidency, the odds of which have risen since the assassination attempt on the former president.
Investors will now be focused on quarterly results, as earnings growth will be an important factor in the continued sustainable outperformance of small caps. For mega-cap stocks, investors will closely watch whether earnings growth justifies the huge capital spending on AI.
Since its inception in May 2000, the iShares Core S&P SmallCap 600 (IJR - Free Report) has returned 886%, whereas the iShares Russell 2000 ETF (IWM - Free Report) has risen 573% over the same period. According to a study performed by S&P Dow Jones Indices, the return differences were primarily due to the inclusion of a profitability factor embedded in the S&P SmallCap 600.
To learn about the iShares Core S&P SmallCap 600 ETF (IJR - Free Report) , iShares Russell 2000 ETF (IWM - Free Report) , Invesco S&P SmallCap Momentum ETF (XSMO - Free Report) , and Avantis U.S. Small Cap Value ETF (AVUV - Free Report) , please watch the short video above.
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Will Small-Cap Stocks Continue to Outperform?
Investors have piled into small-cap stocks since the latest inflation report increased the odds of interest rate cuts by the Fed. Initially, there was a violent rotation, with investors selling the Magnificent Seven stocks, including the high-flying NVIDIA (NVDA - Free Report) , and buying into cheaper areas of the market.
The rally was accelerated by short covering by some hedge funds. It remains to be seen whether this is an inflection point for small caps or merely a technical move.
After years of underperformance, small caps now appear very attractively valued. The difference in valuations between the two groups is the widest it has been in over 20 years, according to some measures.
Small companies were previously hurt by recession worries and higher interest rates, as they are particularly sensitive to the economy. They generally have a higher debt burden, mostly at floating rates. Furthermore, they don't have access to the bond market.
On the other hand, mega-cap companies have huge cash reserves, and many of them refinanced their bonds to take advantage of low interest rates before the Fed began raising rates in 2022.
Small-cap stocks, which are domestically oriented, could also benefit from a Trump presidency, the odds of which have risen since the assassination attempt on the former president.
Investors will now be focused on quarterly results, as earnings growth will be an important factor in the continued sustainable outperformance of small caps. For mega-cap stocks, investors will closely watch whether earnings growth justifies the huge capital spending on AI.
Since its inception in May 2000, the iShares Core S&P SmallCap 600 (IJR - Free Report) has returned 886%, whereas the iShares Russell 2000 ETF (IWM - Free Report) has risen 573% over the same period. According to a study performed by S&P Dow Jones Indices, the return differences were primarily due to the inclusion of a profitability factor embedded in the S&P SmallCap 600.
To learn about the iShares Core S&P SmallCap 600 ETF (IJR - Free Report) , iShares Russell 2000 ETF (IWM - Free Report) , Invesco S&P SmallCap Momentum ETF (XSMO - Free Report) , and Avantis U.S. Small Cap Value ETF (AVUV - Free Report) , please watch the short video above.