The outlook for shares of smaller US companies, which have underperformed larger markets this year, is further clouded by the possibility that interest rates Wall Street will stay high as the Federal Reserve fights inflation.
By the end of 2023, small-cap stocks were soaring on growing expectations that the Fed would soon start to ease monetary policy and would no longer be raising interest rates. For smaller businesses, who depend more on debt financing and consumer spending, that would be a welcome shift.
That being said, the likelihood of rate cuts this year has been undermined by persistently high inflation, which has hurt small cap stocks. The S&P 500 has gained 7.5% so far this year, while the Russell 2000 has only gained 0.4%. Additionally, uncertain earnings are anticipated, so there isn’t much incentive for investors to move their investments away from larger firms and towards less hazardous segments of their portfolios.
According to Michael Arone, Chief Investment Strategist for State Street’s SPDR Business, “investors are sceptical right now about small cap stocks because of higher rates and stickier inflation, and they need greater clarity that the Fed will be cutting rates this year before moving in.” Arone has been purchasing small caps anticipating rate cuts later in the year.
