Shares of small companies in the United States rose more strongly than their larger peers in June as investors bet on the strength of the domestic economy, but analysts warn that the momentum could point to the impact of the Federal Reserve rate hike more broadly.
The Russell 2000 index of small companies, often seen as a frontrunner for the broader economic outlook, rose more than 8 percent this month, hitting its highest level since the regional banking crisis in the United States in March and surpassing strong gains for the Standard & Poor’s index. 500 and the Nasdaq Composite over the same period.
The Standard & Poor’s and Nasdaq indexes jumped 5.9 percent and 6.5 percent, respectively.
The move comes against the backdrop of a surge in US stocks this year, as gains in stocks linked to artificial intelligence pushed Wall Street’s benchmark indices to their highest levels in more than a year. The S&P 500 is back in bull market territory, tempting investors to jump into small-cap companies.
“Eventually people start to look outside the leadership stock and think, if this spike has legs, where is it going next?” said Steve Sosnick, chief strategist at Interactive Brokers.
The demand for small, small businesses was after economic data at the beginning of the month indicated that the US labor market remained resilient in the face of strong monetary tightening by the Federal Reserve.
The upward movement Russell saw in 2000 is also a sign that investors are weathering the March US banking crisis, according to analysts. Banking stocks rank third in terms of weight in the index, after the industrial and healthcare sectors.
“Seeing the index gain support suggests we are finally beyond worrying that another bank-related address will throw financial markets into a tailspin,” said Quincy Crosby, chief global strategist at LPL Financial.
However, some analysts said it was risky to bet on a sustainable recovery for small caps because the full impact of higher borrowing costs has yet to materialize. The Fed raised its key interest rate from near zero 15 months ago to between 5 percent and 5.25 percent, in a bid to tame runaway inflation.
While the Federal Reserve halted its tightening on Wednesday, the central bank surprised investors by indicating that it will likely raise interest rates twice before the end of the year to stem persistent inflation.
The consensus of analysts polled by Reuters indicates that the US economy will enter a recession in the second half of this year as higher borrowing costs begin to hit households and businesses.
In this environment, many expect that small businesses will be the first to sell. They are usually “harder to get financing, and they usually have much smaller cash and cushion balances to protect themselves from hard times,” said Marija Wittmann, chief multi-asset strategist at State Street Global Markets.
After preparing for it, the Russell 2000 is trading at forward earnings 24 times this year, compared to 19 times for the S&P and 36 times for the Nasdaq.
“clearly [small caps] “It’s cheap vs. big-cap technology, but if you look at the broader market, we don’t think it’s cheap or wholly owned,” said Emiel van den Heiligenberg, head of asset allocation at LGIM.
However, even with the possibility of a hard landing still remaining, “use caution [US stock] The markets are a nerve-wracking exercise right now, van den Helgenberg said, when they are going up every day.
“There is hardly a day when negative returns are there — and that swallows people up, because not making any money when your neighbor is making money is very frustrating for a lot of people.”