Russell 2000 gains not likely sustainable - WFII
Nasdaq now up just ~0.1%, S&P 500 slips, Dow off ~0.3%
Cons Disc leads S&P 500 sector gainers; Energy weakest group
Euro STOXX 600 index up ~0.3%
Dollar up slightly; gold, bitcoin slip; crude down >1%
U.S. 10-Year Treasury yield edges down to ~4.18%
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RUSSELL 2000 GAINS NOT LIKELY SUSTAINABLE - WFII
Being on a tear since earlier this month, a rather unloved segment of the U.S. equity market, the small-cap Russell 2000 Index .RUT, has outperformed the blue-chip benchmark S&P 500 .SPX, however, analysts at the Wells Fargo Investment Institute (WFII) make their case that similar surges in the small-cap index tend to be short lived.
The RUT's recent run can be attributed to growing hopes for imminent interest rate cuts from the Federal Reserve, as well as market speculation around the outcome of the upcoming Presidential election, writes Austin Pickle, an investment strategy analyst at WFII.
Similar rallies had been noticed during the 2016 U.S. elections, the beginning of Donald Trump's tariff campaign in 2018, and in the fourth quarter of 2023, when market perception started to change from fear of Fed rate hikes to expecting significant cuts.
"Each of these small-over large-cap rallies had similar triggers, and relative returns failed to evolve into sustained small-cap outperformance," writes Pickle, stating the current iteration of the rally may follow a similar pattern.
The fundamental support for small caps is lacking, with the Russell 2000 yet to exit its earnings reason, as per WFII. They also forecast a near-term economic slowdown in the U.S., something that would only ratchet up the pressure on these companies.
Since over 40% of the companies in the small-cap index are non-earners, and the group overall lacking the balance-sheet flexibility and pricing power that could benefit their large cap peers in the current economic environment as per their forecasts, WFII suggests investors should not chase the recent outperformance of the small-caps.
The Russell 2000 index is up around 11% so far this year, while the S&P 500 is up about 15%.
(Shashwat Chauhan)
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Small-caps have outperformed since early July https://tmsnrt.rs/3Yqf12W
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