Information released by the Federal Reserve at its last meeting, held last week, should accelerate the recent rally of small-cap stocks. Also importantly, many large-cap stocks and medium-cap names in sectors other than technology have been rallying recently as the Street becomes more confident about the economy’s outlook.
And speaking of the economy, recently released data bodes very well for the economic expansion.
Given all of these points, I remain very bullish on the stock market’s medium-term and long-term outlooks, and especially for small-cap stocks.
The Fed’s Meeting Was Especially Bullish for Small-Cap Stocks
Defying the expectations of many on the Street, the Fed, largely in-line with my previous forecasts, estimated that it would cut its benchmark interest rate three times this year.
Moreover, further discrediting the thesis that elevated rates will ultimately be debilitating for the economy in general and economically sensitive small-cap names in particular, the central bank raised its 2024 gross domestic product (GDP) growth estimate for this year to 2.1% above inflation from its previous estimate of a 1.4% expansion above inflation.
Also importantly, Fed Chairman Jerome Powell said following the meeting that, “We believe that our policy rate is likely at its peak for this tightening cycle and that, if the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year.”
Taken together, the results of the meeting indicate that the economic expansion will be relatively strong this year and that the central bank is intent on cutting rates multiple times in 2024. Both of these developments will be very positive for small-cap stocks which are significantly more sensitive to interest rate fluctuations and economic growth changes than their larger peers.
The Rally of Sectors Beyond Tech Should Intensify
In recent weeks, many sectors beyond tech have rallied tremendously. That contrasts markedly with the situation in 2023 when tech accounted for the bulk of the stock market’s gains.
Illustrating this point, in the three months that ended on March 21, financial services stocks jumped 9%, industrials surged 17.5%, and healthcare advanced nearly 8%.
Going forward, this trend should intensify, partially propelled by the Fed’s upgraded economic outlook, its forecast for rate cuts, investors’ increased realization that elevated rates won’t greatly damage the economy, and recent, positive economic data.
In the next section, I’ll take a look at some of that data.
Positive Economic Data
On March 21, S&P reported that its “flash U.S. manufacturing purchasing managers index” had reached “a 22-month high of 52.5” in March. The company added that its “flash U.S. services PMI” had slipped to a “3-month low” of 51.7 this month, but the index remains comfortably above 50, which is the dividing line between expansion and contraction. And S&P described the services metric as “solid.”
What’s more the firm added that the U.S. service’s sector’s employment component rose at the quickest pace so far in 2024 “amid the most optimistic outlook for business activity since May 2022.”
“The survey data point to another quarter of robust GDP growth accompanied by sustained hiring as companies continue to report new order growth ,” S&P’s chief economist reported.
Further supporting my belief that the U.S. economy continues to be strong, the Fed estimates that the U.S. economy will grow at a seasonally adjusted annualized rate of 2.1% above inflation this quarter.
Also noteworthy is that U.S. jobless claims fell a bit last week to 210,000. That was below economists’ average estimate of 213,000, and the number layoffs remains quite small from a historical perspective.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
