Under the expectation of the Federal Reserve's interest rate cut, small-cap stocks have shown a "catch-up rally." Analysts recommend these stocks

According to the Zhitong Finance APP, recently, the focus of the US stock market is shifting from the "seven giants" technology stocks to small-cap stocks. The S&P SmallCap 600 Index and the Russell 2000 Index have risen by 6% and 7% respectively over the past three months, although they still lag behind the nearly 9% increase of the Nasdaq 100 Index. With the Federal Reserve expected to cut interest rates next month, small-cap stocks are likely to gain more momentum.

Francis Gannon, Co-Chief Investment Officer of Royce Investment Partners, stated in an interview, "The breadth of the market rally is expanding, and investors must be aware of this."

Gannon believes that value-oriented small-cap stocks will benefit the most from interest rate cuts. Small-cap companies hold more floating-rate debt compared to large enterprises, making the impact of interest rate cuts on their financing costs more direct. Additionally, the stimulus and tax reduction measures provided by the recently passed "Too Big to Fail" bill in the US Congress may further boost the performance of small-cap companies.

In terms of specific targets, Gannon is optimistic about investment bank Evercore, believing that the company can continue to benefit from the recovery of the IPO market. He also favors industrial companies, including welding tool manufacturer ESAB Corp (ESAB.US) and air conditioning equipment producer Aaon (AAON.US). In the consumer sector, his team holds outdoor goods brand Yeti Holdings (YETI.US) and automotive parts retailer Advance Auto Parts (AAP.US).

The Bank of America strategy team shares a similar view. The bank's equity and quantitative strategist Jill Carey Hall pointed out in a recent report that interest rate cuts could bring stronger short-term excess returns for small-cap stocks than historically, as they are more sensitive to changes in interest rates. Hall emphasized that during the Federal Reserve's easing cycle, the value style of small-cap stocks often outperforms the growth style, with high-quality targets outperforming high-risk companies.

Bank of America's screening shows that several consumer discretionary stocks have entered the preferred list, including homebuilder Meritage Homes (MTH.US) and Taylor Morrison Home (TMHC.US), as well as automotive-related companies Visteon (VC.US), Asbury Automotive (ABG.US), and Group 1 Automotive (GPI.US). Meanwhile, industrial stocks such as school bus manufacturer Blue Bird (BLBD.US) and truck dealer Rush Enterprises (RUSHA.US) have also performed well.

Valuation advantages are also one of the highlights of small-cap stocks. The current price-to-earnings ratio of the S&P 600 Index is about 17 times, nearly 30% lower than that of the S&P 500, whereas historically, there has usually only been a 25% discount. "If you dig deeper, you can still find value," said James Ragan, head of investment research at D.A. Davidson Wealth Management. He pointed out that the Russell 2000 has a higher weight in the financial, industrial, and healthcare sectors, which still possess investment attractiveness.

Market participants generally believe that beyond the "seven giants" technology stocks, Broadcom (AVGO.US), and Palantir (PLTR.US), small-cap stocks are becoming a new investment stage As the Federal Reserve's September meeting approaches, if interest rate cuts are implemented, the "counterattack" of small-cap stocks is expected to accelerate further