Small-cap stocks in the US, which had an impressive rise, were criticized as “not having enough momentum”

The Zhitong Finance App learned that Mike Wilson (Mike Wilson), the chief US stock strategist at Morgan Stanley, said that the recent excellent performance of US small-cap stocks is facing technical resistance and lacks long-term fundamental drivers.

Driven by slowing inflation and an increase in the probability of Trump being re-elected as president, the Russell 2000 index rose 6.7% in July, while the S&P 500 index rose only slightly by 0.8%. This is mainly because lower-than-expected CPI data supports expectations of interest rate cuts from the Federal Reserve, which generally boosted small companies even more.

Wilson and his team said in a client report, “While we respect the popularity or current positions of small-cap stocks, we believe there are limited fundamental and macro reasons for small-cap stocks to continue to perform well.”

According to Morgan Stanley strategists, the sharp rise in small-cap stocks was partly driven by trader demand and short compensation, but compared with previous gains, small-cap stocks were unreasonable in terms of profit.

Wilson's team wrote in a report: “For those following the 2016 script, we would like to point out that the current relative earnings recovery for small-cap cyclical stocks is much weaker than it was then.”

Bank of America strategists quoted EPFR Global data last week as saying that US small-cap funds recorded a weekly inflow of 9.9 billion US dollars, the second-highest in history. In that week, the Russell 2000 Index hit its highest level in more than two years. Among small-cap stocks, strategists believe that growth-oriented stocks have the best prospects.

They concluded: “As the Federal Reserve cuts interest rates, the valuation of these stocks should benefit, but at the same time, their revenue stream is less adversely affected by the reason the Fed cuts interest rates, that is, the decline in pricing power.”