(Original title: Bank of America warns: Small stocks “face challenges” as inflation increases Fed rate cut expectations)
Zhitong Finance APP learned that on Friday, Bank of America Global Research said US small-cap stocks face challenges as Wall Street postpones expectations of an interest rate cut by the Federal Reserve due to concerns about continued inflation.
“With a slight uptick in inflation, our economists now expect the Fed to cut interest rates for the first time in December,” Bank of America equity and quantitative strategists said in a research note on Friday. They had previously predicted that the Fed could cut interest rates in December. It began lowering its benchmark interest rate in June. They also warned that if inflation continues to rise unexpectedly, the start of the Fed’s rate-cutting cycle could be delayed until 2025.
In order to sustainably reduce inflation to its annual target of 2%, the Fed has kept its benchmark interest rate high. But in trading this week, traders pushed back on their rate cut expectations after March’s consumer price index showed higher-than-expected inflation.
“We believe the current uncertainty could challenge the relative performance of the Russell 2000,” Bank of America strategists said.
So far this year, the Russell 2000 is down 0.9%, well behind the closely watched S&P 500. As of Friday, the S&P 500 had gained 7.4% in 2024.
“While small caps have historically typically outperformed at the end of a rate-hike cycle and at the start of a rate-cut cycle, that is not the case today,” Bank of America strategists said.
Markets typically see the Fed’s first rate cut five months after the last rate hike, their report showed. In the current cycle, the central bank last raised its benchmark interest rate to a target range of 5.25% to 5.5% in July – the highest level in 22 years.
Bank of America strategists said: “The longer the delay in the first rate cut, the less confident investors will be that a rate cut will happen, and ending the rate hike cycle may not be enough to restore confidence. “
At the same time, there are goose refinancing risks.
“Longer-term higher interest rates are a key risk for the Russell 2000,” they said, as more than 40% of corporate debt in the index is “short-term or floating rate.” They estimate that if interest rates remain at current levels, non-cash operating earnings will fall by 32% over the next five years.
For the week, the S&P 500 is expected to fall 1.6%, while the Russell 2000 is expected to fall 2.6%, according to FactSet.
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