Small Cap Outperformance Fueled by Lower Borrowing Costs and Favorable Valuations

August Rally in Small Caps

• 📈 The Russell 2000 experienced a significant rally in August, gaining over 7% for the month.
• 🎯 This outperformance is attributed to a combination of factors, with lower interest rates being the primary driver.

Factors Fueling Small Cap Growth

• 💡 Falling borrowing costs are a key positive for small companies, with high-yield rates down and spreads returning to 2007 levels.
• 📊 Balance sheets of small companies are in a better position now compared to several years ago.
• 📉 Significant cuts in earnings estimates earlier in the year have now created an environment for positive surprises.
• 💰 Valuations for small caps reflect a substantial amount of bad news, making them attractive relative to large caps.

Earnings Growth and Non-Earners

• 🚀 The strategist anticipates improved earnings growth for small caps over the next six quarters.
• ⚠️ The percentage of companies within the Russell 2000 that do not earn money has decreased, and this trend is expected to continue as earnings growth improves.
• ✅ The reduction in risk factors, such as high-yield spreads falling below 300 basis points, indicates a risk-on environment for small caps.