The Russell 2000 is up just 0.4 per cent year-to-date, which is significantly less than the S&P 500’s 7.5 per cent gain. Small-cap stocks have struggled this year due to the uncertain outlook caused by the Federal Reserve battling inflation. At the end of 2023, small-cap stocks had surged as hopes rose that the Fed would ease monetary policy, benefiting smaller companies reliant on debt financing and consumer spending. However, the prospect of rate cuts has diminished due to persistent inflation, leading to a lackluster performance by small-cap stocks.
Investors are cautious about investing in small-cap stocks due to higher rates and persistent inflation, prompting them to wait for more clarity on potential rate cuts before reallocating their investments. Despite the challenging environment, the case for smaller stocks might be improving with the recent slowdown in job growth, easing fears of prolonged elevated rates. Fed Chairman Jerome Powell’s reassurance that rates will be lowered this year has also boosted optimism among investors, with futures markets pricing in interest rate cuts later this year.
The upcoming earnings season could play a crucial role in determining the future performance of small-cap stocks, with stronger-than-expected earnings potentially alleviating investor concerns. However, the overall earnings growth for the Russell 2000 is projected to be negative compared to the positive growth expected for the S&P 500. Small-caps are trading at a higher valuation, making them relatively more expensive than larger companies. Despite the challenges, some investors remain optimistic about the preference for small-cap stocks, depending on their view of interest rates.
Notable small-cap companies reporting in the coming week include Bellring Brands, Light & Wonder, and Permian Resources, while larger caps like Walt Disney and Wynn Resorts will also report their earnings, providing further insight into the market sentiment. Although recent developments have been encouraging, the path to rate cuts remains uncertain, with experts advising investors to focus on companies with strong fundamentals to navigate through a potential extended Fed pause. It is essential for investors to consider various factors before making decisions, as the Fed continues to gather evidence to support its future monetary policy decisions.
