Bank of America: Powell's speech may become a short-term catalyst for U.S. small-cap stocks, while long-term recovery still relies on fundamentals

According to the Zhitong Finance APP, Bank of America released a research report stating that Federal Reserve Chairman Jerome Powell's speech on Friday at the Jackson Hole Global Central Bank Annual Meeting could become the biggest catalyst (either positive or negative) for the Russell 2000 index, which is primarily composed of small-cap stocks. Powell's dovish remarks could stimulate a rebound in small-cap stocks, while more hawkish comments could bring short-term downside risks—especially since the market has currently priced in two interest rate cuts by the Federal Reserve this year.

Historically, small-cap stocks have outperformed large-cap stocks during the interest rate cut cycles in U.S. economic recessions, while their performance during non-recession interest rate cut cycles has been more mixed. Currently, interest rate cuts may bring greater short-term excess returns to small-cap stocks than in the past, as small-cap stocks have become more sensitive to interest rates and the Federal Reserve over the past 1-2 years, alongside increased refinancing risks. If interest rate cuts occur in the absence of weak macro data, given the heightened sensitivity of small-cap stocks to interest rates and increased refinancing risks, the effects may be more positive than historically observed.

However, Bank of America added that the sustained outperformance of small-cap stocks may still depend on factors outside the Federal Reserve, including fundamentals, tariffs (small-cap stocks are more vulnerable due to lower profit margins), and the macro environment (notably, the bank's U.S. cyclical indicators seem to be turning towards "recovery" again, but have been in a state of macro chaos for the past two years).

Bank of America pointed out that if Powell signals interest rate cuts on Friday, the sustainability of the small-cap stock rebound is likely to depend on the earnings backdrop. Small-cap stocks exceeded earnings expectations in the second quarter, with other positive factors including improved guidance and a reduction in the severity of negative corporate sentiment. Despite exceeding earnings expectations in the second quarter, the outlook for the second half of the year is high, and earnings forecasts for small-cap stocks in the third and fourth quarters have been continuously downgraded since early July. Another area of concern is revenue trends (the magnitude of small-cap stock surprises is smaller) and tariff negotiations (small-cap stocks are more affected by tariffs due to lower profit margins).

Bank of America stated that since 1989, the historical performance of the Russell 2000 factor group during Federal Reserve interest rate cut cycles (12 months after the first cut and throughout the entire cut cycle) has shown that: value factors generally outperform growth factors; momentum factors lead; quality factors outperform; risk factors lag; and cash return factors perform well