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Small Caps Set to Soar: Why Analysts Are Bullish on Small-Cap Stocks

Mike Cianciabella | October 25, 2024

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The Data Keep Screaming “Small Caps”

As we navigate through the current economic landscape, one thing becomes increasingly clear: the resilience of the U.S. consumer continues to shine through. In fact, experts suggest that this consumer strength, coupled with other economic factors, indicates that small-cap stocks are on the rise. Financial analysts are seeing promising signs for small-cap stocks, thanks to tailwinds from consumer spending, expected interest rate cuts, and the upcoming earnings season.

The Strength of Consumer Spending

Last week, the latest retail sales figures illustrated the persistent strength of consumer spending, which makes up nearly 70% of the nation’s GDP. According to recent data from the Commerce Department, U.S. retail sales in September climbed by more than anticipated, increasing by 0.4% after a modest 0.1% rise in August. Even more encouraging, when excluding the effects of autos and gasoline, sales jumped by 0.7%. This robust spending has contributed to what is likely to be another quarter of solid economic growth, as reflected in the Atlanta Federal Reserve’s GDP Now model predicting a growth rate of 3.4% for the third quarter.

Declining Inflation and Interest Rates

Inflation has been on a declining trajectory for several months, although it has shown signs of being sticky in recent weeks. Nonetheless, analysts believe that the current inflation levels may prompt the Federal Reserve to consider further interest rate cuts. The CME Group’s FedWatch Tool currently estimates a staggering 91% certainty for a 25-basis-point cut in the upcoming November meeting.

The combination of resilient consumer spending and decreasing interest rates creates a bullish climate for the stock market. In this context, analysts, including prominent financial voices, are particularly optimistic about small-cap stocks.

Small Caps Are Set to Shine

According to a respected financial analyst, small-cap stocks are uniquely positioned to benefit from dipping interest rates. Generally, smaller companies are more leveraged compared to their larger counterparts; thus, they gain significantly when borrowing costs decrease. The market has seen a pronounced divergence in performance between larger-cap stocks and small caps in recent months. However, as we move forward, expectations are set that this performance gap will narrow as small caps begin to rally.

From early October through mid-October, small-cap stocks showed resilience with the iShares Russell 2000 ETF climbing by 2.7%, outperforming the S&P 500, which gained only 1.4%. Other indices also saw lesser gains, signifying renewed investor interest in smaller firms.

Additional Tailwinds for Small Caps

Several tailwinds further suggest a brighter outlook for small-cap stocks:

  • Seasonality: The stock performance period is about to hit one of its strongest phases of the year, historically favoring small caps.
  • Political Climate: With the presidential election campaign heating up, both candidates have been making exciting promises, improving consumer sentiment and boosting enthusiasm on Wall Street.
  • Earnings Season: Initial results for Q3 have surpassed expectations, with analysts predicting stronger growth for the S&P 500 than previously estimated.

These favorable factors have led to bullish sentiments among seasoned analysts who express confidence in small-cap stocks. One would say, “I’m very, very bullish right now.”

Insights into Big Money Trends

With the spotlight on small-cap stocks, analysts are employing algorithm-driven models to gauge market movements effectively. High-powered computers run algorithms that monitor significant stock trends to isolate buy signals from the “Big Money” investors—those massive institutions conducting significant transactions. Understanding where this big money is headed is critical as it can foreshadow market movements for individual stocks and sectors.

Recently compiled data indicates that over the last three months, a staggering 81% of all big money buy signals have been concentrated in stocks valued at $50 billion and under. This marks a significant shift toward smaller companies, with many investors looking to capitalize on their potential for growth.

Conclusion

In conclusion, the alignment of various positive economic factors—resilient consumer spending, falling inflation, and lower interest rates—creates a conducive environment for small-cap stocks to thrive. With the market displaying signs of recovery and the attention of big money investors shifting toward smaller companies, there may never be a better time for investors to pay close attention to the small-cap sector. As seasoned analysts maintain a fortuitous outlook, keen investors should keep a close eye on this corner of the market for potential opportunities ahead.