In a previous column, published on Feb. 28, I predicted that medium-cap and small-cap stocks would surge, powered by their “favorable fundamentals and low valuations.” Last week, the latter process did indeed occur to a very large extent. Meanwhile, boding well for the tech sector. the artificial intelligence boom is spreading to many more stocks. And in a phenomenon that’s lifting many consumer discretionary equities, investors’ confidence in the economy appears to be rapidly improving. All in all, it does appear that investors are becoming much more optimistic, in line with the view that the well-known stock picker, Ken Fisher, has shared about the market’s current status.
Finally but importantly, it appears that the Federal Reserve remains open to cutting interest rates later this year. This is an important consideration for investors who invest in small-cap stocks.
Small-Cap and Medium-Cap Stocks Rallied
The Russell 2000, which is made up of small and medium names, jumped by an impressive total of nearly 3% last week. The huge increase shows that my thesis about those names is indeed playing out. The surge also indicates that many more investors, per my long-held thesis, are realizing that elevated interest rates do not constitute certain for the vast majority of small and medium companies. Indeed, even the most currently unprofitable firms with powerful competitive advantages can overcome high rates. That’s because, as former FDIC head Sheila Bair has said, “Truly promising innovations will (always) attract capital,” even when interest rates are relatively high.
As more investors internalize the latter points, the demand for the shares of medium and small companies will surge, causing many of the bears who believed in the ill-fated “rates are everything for these companies” thesis to cover their positions. Consequently, I continue to believe that a high proportion of these stocks will indeed undergo huge short-covering rallies in the medium-to-long term.
The Tech Sector Is Getting Big Boosts
Many investors are starting to realize that the positive AI boom will not be limited to Microsoft (NASDAQ:MSFT), Nvidia (NASDAQ:NVDA), and a few other chip makers.
Furthering this revelation, Dell Technologies (NYSE:DELL), previously seen as an unexciting tech “dinosaur,” delivered much better-than-expected fourth-quarter results on March 1. The firm’s strong report was driven by “high demand for its artificial intelligence-optimized servers,” Seeking Alpha explained. In the wake of Dell’s strong numbers, its shares catapulted a huge 31.6% higher on March 1.
Following Dell’s results, other, old-time tech hardware makers rose meaningfully, with HP (NYSE:HPQ) advancing 3.8%, Hewlett Packard Enterprises (NYSE:HPE) climbing 3.5% (including after-hours action), and Western Digital (NASDAQ:WDC) advancing 8%.
Also causing investors to look more positively on hardware makers was S&P Global’s decision, announced after the market closed on March 1, to invite another server maker, Super Micro (NASDAQ:SMCI), to join the S&P 500. After jumping 4.5% during the regular session, SMCI stock climbed another 12.5% on the news of its accession to the index.
Finally, Nvidia’s investments in two startups that utilize AI in healthcare should boost the share prices of many other start-ups that are using AI in major fields. And NVDA’s investment in SoundHoundAI (NASDAQ:SOUN), a relatively small company whose technology allows AI systems to more quickly respond to human voices, should increase investors’ faith in small firms developing AI technology. This bodes well for small-cap stocks.
Consumer Discretionary Names, the State of the Market, and the Fed’s Outlook
With the labor market and consumer spending staying strong, fears of a recession are rapidly dissipating among investors while most consumer discretionary firms have been reporting strong quarterly results. The latter trends, in turn, are benefiting many stocks within the sector. As evidence of that assertion, consider that the Vanguard Discretionary ETF (NYSEARCA:VCR) rose nearly 10% between Jan 31 and March 1. As investors’ attitudes about the economy continue to improve, consumer discretionary stocks should keep performing very well going forward.
Meanwhile, the stock market as a whole keeps delivering outstanding returns. Over the month that ended in March, for example, the S&P 500 rose 3.6%, while the index advanced 11.8% in the three months that terminated on the same data. As a result, I continue to agree with Ken Fisher’s recent assertion that we’re in the early stages of the “optimism” part of John Templeton’s famous description of the progression of bull markets. Specifically, Templeton said, “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die of euphoria.”
Finally, the Fed looks poised to feed that optimism, as two Fed members, Tom Barkin and Austan Goolsbee, remained open to cutting rates later this year. Barkin said “I’m still hopeful inflation is going to come down and if inflation normalizes then it makes the case for why you want to normalize rates.”
Goolsbee was more optimistic, stating that inflation looks poised to fall further, while “rates are pretty restrictive” already. Given these comments, it’s clear that Goolsbee expects to support considerable rate cuts later this year.
On the date of publication, Larry Ramer held a long position in SMCI. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
