US President Donald Trump has fired Federal Reserve Governor Lael Brainard, who oversaw the recent interest rate hike. The move comes amid speculation that Jerome Powell may cut rates in September due to a shift in market sentiment. However, there is no confirmation on whether this change will be implemented.
Bank of America expects the Russell 2000 index to extend its gains as small caps benefit from the Federal Reserve’s dovish stance and heightened sensitivity to interest rate cuts. Nearly half of Russell 2000 debt has short-term or floating-rate maturities, making them more sensitive to Fed easing.
BofA strategist Jill Carey Hall notes that small caps’ refinancing exposure makes them more sensitive to Fed easing than in past cycles. The bank estimates a cumulative hit of 35% on net interest expense over the next five years if the Fed cuts rates by 100 basis points, which is lower than the estimated 42% if no cuts occur.
Hall recommends focusing on factor exposures within small caps that have historically outperformed during easing cycles. She suggests sticking to Quality and Value > Growth styles, as these have historically performed well in recovery phases.
Despite some seasonal challenges, BofA sees attractive opportunities in small-cap stocks, particularly those with less leverage, strong margins, and revised upward earnings estimates. The bank recommends identifying names with these characteristics to take advantage of the potential rate cut.
As markets await further guidance from Jerome Powell, investors can expect gains or losses based on their strategies and risk tolerance.
Source: https://www.investing.com/news/stock-market-news/russell-2000-outperformance-to-continue-bofa-4208267