Gold prices fall as geopolitical tensions ease; U.S. CPI looms
Investing.com - A potential U.S. recession bodes poorly for small-cap stocks, with investors already pricing in a "nasty pullback," according to analysts at Jefferies.
In a note to clients, the analysts said that small- and mid-cap equities have been struggling to "gain any traction," with fears over a possible downturn in the broader economy driving up volatility.
The analysts flagged that longstanding upward momentum in these stocks has also faltered, noting that, after prior winning streaks, these names have "fall[en] out of favor for the next six to seven quarters."
A sliding U.S. dollar and potentially dropping earnings do not provide a upbeat outlook for this trend, they added.
Small-caps hovered around record highs following U.S. President Donald Trump’s election victory in November, but the climb higher has since cooled. The Russell 2000 index, a tracker of small-cap stocks, has fallen by more than 4% so far this year.
"Momentum has broken, and we don’t see it coming back anytime soon," the Jefferies analysts wrote.
Worries have increased that the Trump administration’s tariff plans could push up inflationary pressures and weigh on growth -- trends that could impact small-cap names with more limited financial resources that are particularly sensitive to periods of economic malaise. Higher inflation can especially push up interest rates, denting a small-cap sector that is exposed to increased borrowing costs.
However, the Jefferies analysts said they do not see a recession as their "base case" scenario, noting that companies still have "access to capital." They added that high-yield credit spreads -- the difference in the yields of high-yield bonds and investment-grade corporate debt -- is "anchored below their long-term average." A widening spread can be signal of weakening conditions in the broader economy.
Still, the analysts recommended that investors "stay away" from so-called "momentum" stocks. Instead, they highlighted several "buy"-rated names that they say "tend to have less price and earnings volatility," including Caci International (NYSE:CACI), Encompass Health (NYSE:EHC), Ferguson (NYSE:FERG), and Unum Group (NYSE:UNM).