Rate Hike by Fed Is Not Enough To Boost the Small Cap Stocks in the Long Run

Rate Hike by Fed Is Not Enough To Boost the Small Cap Stocks in the Long Run

As expected, the Central bank of America hiked the rates by a quarter of a percentage point on Wednesday, but gave no indication as to how they will accelerate the pace of monetary tightening. Following this rate hike, the small-caps benefitted, but analysts are of the view that they won’t be able to keep up the pace with the mid-caps and the large caps in the long run.

The rate hike simply means that borrowing cost will increase and this will hit the small caps more than their larger brethren. The stock market was on fire since November 8 when it was confirmed that Donald Trump is the new occupant of the White house. The markets were betting on the election campaign promises of Trump where he has assured that he will bring in reforms that will help the companies to bring down their taxes.

All the three major indices were making new highs and in fact, Dow Jones gave a high closing consecutively for 12 days. A big contribution to this stock market rally was initially from the stocks in the small-cap space.

In the New Year, the performance of the small caps began to dwindle and results show that small-cap earnings have not rebounded in the manner large caps has. The investors are finding that small caps are comparatively expensive and hence are shying away from them and investing in large or the midcaps.

The equity strategist at Jefferies, Steve DeSanctis said, “We’re in a show-me state for small caps. We’ve gotten (price-to-earnings) multiple expansion, so you need earnings growth.

Jan and Feb are usually the result season with most of the companies coming out with their Q4 earnings and the Thomson Reuters data shows that the average Q4 earnings for the companies listed in S&P 600 were down by 1% as compared to the same a year back.

S&P 500’s earnings, on the other hand, rose 7.8 percent this year as compared to the same last year. It is expected that the 2017 results will show profit growth for S&P 600, but analysts believe that the rate of growth will be much lesser than S&P 500.

At present, S&P 600 is trading at 20.4 times forward earnings, which is higher than its long-term average of 17. The index rose by 24.7 percent in 2016, but since the beginning of this year, it has gone up only by 1.4%.

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