Bank of America Warns Small Stocks Face Challenges Amid Inflation Concerns
Bank of America Global Research has issued a warning regarding U.S. small-cap stocks facing difficulties as expectations for an interest rate cut by the Federal Reserve are being delayed due to rising inflation concerns. The bank’s equity and quantitative strategists stated in a research note on Friday that they now anticipate the Fed to cut interest rates for the first time in December, as opposed to their previous prediction of a rate cut earlier in the year.
The delay in the rate cut comes as the Fed aims to address inflation and keep it in line with its 2% annual target. However, traders have pushed back on their rate cut expectations following higher-than-expected inflation numbers in March. This has led to uncertainties surrounding the relative performance of the Russell 2000, which is currently trailing behind the S&P 500.
Historically, small caps have outperformed during the transition from a rate hike cycle to a rate cut cycle. However, Bank of America strategists noted that this may not be the case currently. The delay in the Fed’s rate cut could impact investor confidence, particularly as refinancing risks loom over more than 40% of corporate debt in the Russell 2000 being short-term or floating rate.
As a result, the S&P 500 is expected to decline by 1.6% for the week, while the Russell 2000 is forecasted to fall by 2.6%, according to FactSet. The longer the delay in the rate cut, the less certain investors will be about its occurrence, highlighting the challenges small-cap stocks may face in the coming months.