Expectations of interest rate cuts set off a small-cap stock frenzy! Jefferies warns: capital flight and profit concerns remain

The Zhitong Finance App learned that Jefferies released the latest monthly US stock strategy report, pointing out that the strong performance of small-cap stocks in August ended the situation where they continued to outperform large-cap stocks. However, there is still a hidden crisis behind the small-cap stock carnival.

The Russell 2000 Index rose 7% in August, setting its best performance for the same month since 2000. The index rebounded 35% from the April 8 low, 441 basis points higher than large-cap stocks. Microstocks performed particularly well, rising 9.3% in August and rising 47% from their lower point.

The report points out that the rebound in small-cap stocks was mainly driven by low market capitalization, low quality, non-profit companies. The low market capitalization sector rose 10.5% in August and rose 52.8% since April 8; non-profit enterprises rose 8.5% in August, rising 52.4% from a lower point; the high beta sector rebounded 63.8% from a lower point. Expectations of the Federal Reserve's interest rate cut have heated up, and corporate profits far exceeding expectations have become key factors driving the rebound in small-cap stocks.

It is worth noting that despite the impressive short-term performance of small-cap stocks, capital has continued to flow out of small-cap ETFs, with a cumulative outflow of 11.4 billion US dollars since the market low. Furthermore, analysts expect that the profit growth of large-cap stocks in the third quarter will once again lead small-cap stocks, and the fourth quarter will be a critical time to “cross the threshold.”

In terms of stock style, Jefferies said that cyclical stocks performed steadily. The sector rose 7.6% in August, rebounded 40.2% from a low point, and has risen 10% so far this year; while long-term growth stocks have risen 6.8%, 33.1%, and 2.4%, respectively. As the Russell 2000 Index rebounded from a low point, the performance of bond agency products lagged behind, and the lower point rose 17.7%.

Jefferies also noticed that since the beginning of April, actively managed funds have generally lagged behind the benchmark index; only large-cap value funds have outperformed the benchmark. Out of all funds tracked by Jefferies since this year, only 28.4% of funds have outperformed the benchmark.