NEW YORK — Suddenly, smaller stocks seem to be getting more attention on Wall Street.
After years of being pummeled by their bigger rivals, some of Wall Street’s smallest stocks have shown a lot more life recently. Hope for upcoming interest rate cuts have prompted investors to look at smaller stocks through a different lens.
Smaller companies, which often carry heavy debt loads, may experience more relief from lower borrowing costs than large multinationals. In addition, critics said the Shares of major technology companies that have had the market in their grip for years seemed expensive after their rapid rise.
The small stocks in the Russell 2000 index rose a stunning 11.5% in five days starting July 11. The gains looked even more striking compared to the tepid 1.6% gains for the large stocks in the S&P500 over the same period. Investors pumped $9.9 billion into funds focused on small-cap U.S. stocks last week, the most since 2007, according to strategists at Deutsche Bank.
It was all encouraging signs for analysts, who argue that a market with many stocks rising is healthier than one that relies on just a handful of stars.
If all this sounds familiarit should. Hopes for a broadening of the market have periodically surfaced on Wall Street, including late last year. Each time, they have eventually fizzled out and Big Tech has resumed its dominance.
Of course, things look different this time around in some ways. Some of the boost for small stocks may come from rising expectations for a Republican victory in the November election, following President Joe Biden’s win. disastrous debate performance last month. That pushed up U.S. stocks, which were expected to benefit from a White House that could be hostile to international trade, among other things.
Traders also believe rate cuts are much closer than before, with expectations recently at 95% certainty that the Fed will take action as early as September, according to data from CME Group.
But some professional investors are still not completely convinced.
“Let go of the small cap chase because it’s probably not sustainable,” said Lisa Shalett, Chief Investment Officer at Morgan Stanley Wealth Management.
She points out that 60% of the companies in the small-cap index are struggling with profitability, partly because private equity firms have already pulled many money-making companies out of the stock market. Smaller stocks also tend to be more dependent on consumer spending than larger companies, and consumers in the bottom of the income spectrum already show the pressure of the still high prices.
Rate cuts seem more likely now that Federal Reserve officials have talked about the dangers of keeping rates too high for too long. But the Fed may not cut rates as quickly or as deeply as in previous cycles if inflation remains high for longer, as some investors suspect.
Small stocks, which have struggled with five quarters of declining profits due to higher rates, are also less likely to see an earnings boost from the artificial intelligence wave according to strategists at the BlackRock Investment Institute, a huge impact on the economy.