Small-cap quality concerns are overblown
The guest argued that small-cap stocks are getting an unfair reputation for low quality, as many non-earning components like biotech represent early-stage growth rather than structural weakness.
The argument
Lori Calvasina of RBC noted that while low-earnings-quality stocks have outperformed, investors are becoming more comfortable with biotech and early-stage tech companies. However, she cautioned that Fed hawkishness and rising interest rates remain a tactical headwind for the Russell 2000.
The thesis, stress-tested
✓ What validates it
- ✓Continued strength in ISM and jobs data supporting small-cap fundamentals
- ✓Stabilization of interest rates easing pressure on small-cap valuations
▸ Risks discussed
- ▸Higher-for-longer interest rates historically trip up the small-cap trade
- ▸High volatility and choppy performance in the Russell 2000
Hear it yourself
"What do you make of that? So if you look at Russell, it's been outperforming since last fall, but it's been very, very choppy. It's been sort of jagged, you know, with big swings up and down. And one thing that seems to trip small caps up, you know, the fundamentals are fantastic right now in terms of jobs growth reaccelerating. ISM is above 50 for several months in a row. The animal spirits feel like they're coming back to the economy. But at the same time, interest rates and when you bake in hikes from the fed or dial down your dovishness, since 2022, that's been a surefire way to trip up the small cap trade."
AFFILIATE LINK · ZORTIX MAY EARN A COMMISSION · NEVER A RECOMMENDATION TO TRADE