The rising small-cap stocks in the US stock market are being poured cold water on. Morgan Stanley commented that "the momentum is insufficient"
Recent strong performance of US small-cap stocks has been affected by technical resistance and a lack of long-term fundamental driving factors. The Chief US Stock Strategist at Morgan Stanley stated that despite small-cap stocks being driven by trader demand and short covering, there is a lack of rationality in terms of earnings. They believe that growth-oriented stocks have the best prospects, estimating that these stocks' valuations will benefit from the Fed rate cuts, but their revenue streams will be less affected by the rate cuts. A strategist at Bank of America mentioned that last week, inflows into small-cap funds hit the second-highest historical record, with the Russell 2000 Index reaching its highest level in over two years
According to the latest information from Zhitong Finance and Economics APP, Mike Wilson, Chief US Stock Strategist at Morgan Stanley, stated that the recent strong performance of US small-cap stocks is facing technical resistance and lacks long-term fundamental driving factors.
Driven by slowing inflation and the increased probability of Trump's re-election, the Russell 2000 Index rose by 6.7% in July, while the S&P 500 Index only slightly increased by 0.8%. This is mainly due to lower-than-expected CPI data supporting expectations of a Fed rate cut, which typically boosts smaller companies more.
Wilson and his team stated in a client report, "Despite our respect for the popularity or current positioning of small-cap stocks, we believe that the fundamental and macro reasons for the continued strong performance of small-cap stocks are limited."
In the view of Morgan Stanley strategists, the sharp rise in small-cap stocks is partly driven by trader demand and short covering, but compared to previous rallies, small-cap stocks lack rationality in terms of earnings.
In a report, Wilson's team wrote, "For those who are watching the 2016 script, we want to point out that the relative return pullback of small-cap cyclical stocks is much weaker than back then."
Strategists at Bank of America cited EPFR Global data last week, stating that US small-cap funds recorded a single-week inflow of $9.9 billion, the second highest ever. During that week, the Russell 2000 Index reached its highest level in over two years. Among small-cap stocks, strategists believe that growth-oriented stocks have the best prospects.
They concluded, "With the Fed rate cut, the valuations of these stocks should benefit, but at the same time, their income streams are less affected by the Fed rate cut, namely the adverse impact of declining pricing power."