Interest rate cut expectations ignite a frenzy in small-cap stocks! Jefferies warns: capital outflows and profit concerns still exist
Jefferies' latest report points out that despite the strong performance of small-cap stocks in August, which recorded the best performance for the same month since 2000, there are still underlying crises. The rebound in small-cap stocks is mainly driven by low market capitalization, low-quality, and unprofitable companies, and there has been a continuous outflow of funds from small-cap stock ETFs. Analysts expect that large-cap stock earnings growth will lead small-cap stocks in the third quarter, with the fourth quarter being a critical moment
According to Zhitong Finance APP, Jefferies has released its latest monthly report on U.S. stock strategies, pointing out that small-cap stocks performed strongly in August, ending a prolonged period of underperformance compared to large-cap stocks. However, there are still hidden risks behind the small-cap stock rally.
The Russell 2000 Index rose 7% in August, marking its best performance for the month since 2000. The index has rebounded 35% from its low on April 8, outperforming large-cap stocks by 441 basis points. Micro-cap stocks performed particularly well, rising 9.3% in August and up 47% from their lows.
The report indicates that the rebound in small-cap stocks is mainly driven by low market capitalization, low quality, and unprofitable companies. The low market capitalization sector rose 10.5% in August, up 52.8% since April 8; unprofitable companies increased by 8.5% in August, up 52.4% from their lows; and high-beta sectors rebounded 63.8% from their lows. The rising expectations of interest rate cuts by the Federal Reserve and corporate earnings exceeding expectations have been key factors driving the rebound in small-cap stocks.
It is noteworthy that despite the impressive short-term performance of small-cap stocks, there has been a continuous outflow of funds from small-cap stock ETFs, with a cumulative outflow of $11.4 billion since the market low. Additionally, analysts expect that large-cap stock earnings growth will once again lead small-cap stocks in the third quarter, with the fourth quarter being a critical moment for "crossing the threshold."
In terms of stock styles, Jefferies stated that cyclical stocks performed steadily, rising 7.6% in August, recovering 40.2% from their lows, and up 10% year-to-date; while long-term growth stocks rose 6.8%, 33.1%, and 2.4%, respectively. As the Russell 2000 Index rebounded from its lows, bond proxy products lagged behind, rising 17.7% from their lows.
Jefferies also noted that since early April, actively managed funds have generally underperformed their benchmark indices, with only large-cap value funds outperforming the benchmark. Year-to-date, only 28.4% of the funds tracked by Jefferies have outperformed their benchmarks
