The Russell 2000 Index, which includes small-company stocks, soared above its all-time high on September 17, right after the Federal Reserve announced its decision to cut rates. By the close of trading, however, the index lost ground. The growth, though short-term, reflects investors' hopes for further easing of monetary policy, Wells Fargo believes. At the same time, BCA Research calls the rally "fragile".

Details

The Russell 2000 index rose above the historical maximum for the first time since November 2021 and reached 2453.36 points during trading on Wednesday, September 17. The index failed to hold this result: the trades closed at 2407.34 points, thus, the index added 0.2% by the end of the day.

Bloomberg calls the long-awaited - albeit short-lived - record a "stunning comeback for the index." The Fed's interest rate cut - by 25 basis points - contributed to its growth. Small-cap players are traditionally considered the most sensitive to the Fed's policy easing, the agency explained. And, as follows from the schedule published by the regulator, by the end of the year it expects a decrease of another 50 basis points.

What the analysts are saying

"A few months ago, small-cap stocks seemed hopeless," Irene Tankel, chief U.S. equity strategist at BCA Research, told Bloomberg. - Small-caps were cheap, unpopular and ready to rebound. Add to that expectations of Fed policy easing, tax breaks and more optimistic earnings forecasts, and the rally suddenly gained strength."

The Russell 2000 has already soared 36.7 percent from the April low that it hit after President Donald Trump's announcements about imposing import duties. The rise has coincided with "risk sentiment and expectations of three Fed rate cuts this year," according to Wells Fargo Investment Institute global equity strategist Doug Beath, whose opinion is also cited by Bloomberg. "Interest expense accounts for a significant portion of small-caps' earnings, and lower short-term rates will help reduce that burden," he said.

Jefferies Financial Group strategist Stephen DeSanctis confirms that the macroeconomic environment is favorable for small-cap stocks. In the second quarter, more than 60% of Russell 2000 companies beat Wall Street earnings forecasts, Bloomberg pointed out earlier. "By the end of this year or next year, earnings growth for players in this segment could outpace both large-cap companies overall and the Magnificent Seven," DeSanctis suggested.

Small-caps' total revenue is firmly approaching 2022 highs, adds Bloomberg Intelligence strategist Michael Kasper. This, he says, suggests that there is still plenty of room for growth in the segment.

However, analysts disagree on how long it can last. Small-cap companies have near-term growth potential, but it is unlikely to last at least 12 months, says Goldman Sachs strategist David Costin. "The recovery has been impressive, but many players in the segment are facing rising costs and shrinking margins, which makes this rally fragile," warns Tankel of BCA Research.

This article was AI-translated and verified by a human editor

Share