Small-Cap Stocks Surge 7% in August on Rate Cut Hopes, Earnings

In August, small-cap stocks experienced a significant rally, ending a prolonged period of underperformance relative to large-cap stocks. This surge was driven by expectations of interest rate cuts and better-than-expected corporate earnings. The Russell 2000 Index, a benchmark for small-cap stocks, rose by 7% in August, marking its best monthly performance since 2000. This index has rebounded by 35% from its low point in early April, outperforming large-cap stocks by 441 basis points. Micro-cap stocks, in particular, saw an impressive 9.3% increase in August, rising 47% from their low point.

The rally in small-cap stocks was primarily fueled by low market capitalization, low-quality, and non-profitable companies. The low market cap segment rose by 10.5% in August and has increased by 52.8% since early April. Non-profitable enterprises saw an 8.5% increase in August and have risen by 52.4% from their low point. High beta stocks, which are more volatile, rebounded by 63.8% from their low point. The anticipation of interest rate cuts by the Federal Reserve and stronger-than-expected corporate earnings were key drivers of this small-cap stock rebound.

Despite the strong short-term performance of small-cap stocks, there are underlying concerns. Funds have been continuously flowing out of small-cap stock ETFs, with a cumulative outflow of 114 billion dollars since the market low point. Additionally, analysts predict that large-cap stocks will continue to lead in earnings growth for the third quarter, with the fourth quarter being a critical period for small-cap stocks to catch up.

In terms of stock styles, cyclical stocks have shown stable performance, rising by 7.6% in August and 40.2% from their low point, with a year-to-date increase of 10%. In contrast, long-term growth stocks have risen by 6.8%, 33.1%, and 2.4% respectively. As the Russell 2000 Index rebounded from its low point, bond proxy products lagged behind, rising by 17.7% from their low point.

Since early April, actively managed funds have generally underperformed their benchmarks, with only large-cap value funds outperforming. Year-to-date, only 28.4% of the funds tracked by have outperformed their benchmarks. This indicates that the rally in small-cap stocks may not be sustainable in the long term, and investors should remain cautious about the potential risks and uncertainties ahead.