Small-Cap Companies Show Signs of Life On Rate Cut Rumors, Large-Cap Worries

Since October, American large-caps have been the only game in town for investors — with the Magnificent 7 stocks driving most of the S&P 500’s gains this year. But with concerns about the sustainability of these top-heavy trades, Wall Street is turning back to stocks that were ignored since the waning days of the pandemic.

• With interest rate cuts expected later this year, investors are revisiting small-cap stocks. The Russell 2000, which tracks the 2K smallest US companies, has risen by 4.5% over the past month.
• According to Institutional Investor, small-cap companies have historically outperformed large-cap companies over the long run, sparking investor excitement for a comeback.

No small matter: Small-caps fell from grace after the Fed hinted at interest rate hikes in 2022. Rates have since risen from near-zero to over 5%. But after Thursday’s inflation report, analysts widely expect rates to start falling later this year, helping rate-sensitive names attract bids. Still, they face an uphill battle — analysts say that many quality small-caps were acquired, leaving the Russell 2000 with a high price-to-earnings ratio but weaker profitability. Firms can only hope that rate cuts deliver the financial peace they’ve been waiting for.