U.S. small-cap stocks shine as Wall Street bets the rally will last

Glonghui, January 28｜U.S. small-cap stocks are currently enjoying their moment in the spotlight, and Wall Street does not believe this momentum will end soon. The Russell 2000 Index has just ended its longest period of outperforming large-cap stocks since 1996. As its constituent stocks are highly correlated with economic and credit cycles, it is considered a higher-risk category in the market. Although this performance is remarkable, historically, phases approaching this level of relative strength are often difficult to sustain for long. However, strategists are not concerned. They are increasingly optimistic about the outlook for small-cap stocks, viewing them as a way to participate in a bull market that is being driven by large tech stocks and gradually spreading to the broader market. This bet is based on expectations of accelerating earnings growth, with driving factors including a combination of falling interest rates and economic growth. In addition, regulatory easing, narrowing credit spreads, and further rate cuts are also seen as supportive for these high-beta stocks. “Growth that is strong enough but not overheated, combined with a low or declining interest rate environment, are the two major macro forces driving small-cap stocks higher,” said T. Rowe Price Chief Investment Officer Sebastien Page. “We believe this situation can last another six months.”