Oracle stock falls after report reveals thin margins in AI cloud business
Investing.com -- Small-cap stocks have emerged as the main beneficiaries of a dovish Federal Reserve repricing, Barclays said, as investors rotated into risk-on styles that thrive in easing cycles.
“Small caps surge on rate cut hopes and improved fundamentals,” Barclays strategists led by Madhuresh Rai said, with August’s rally marking one of their strongest stretches since late 2024.
Small-cap Value jumped 8.2% in August, its best since November 2024, beating Growth by 250 basis points.
The Russell 2000 index has gained 36% since April, outpacing the S&P 500’s 30% gain, and now sits just below its post-election peak. Operating leverage has supported earnings growth, with small-cap margins hitting three-year highs, while valuations remain compelling despite recent strength, strategists said.
A pickup in IPO activity has also added fresh growth potential to the index.
Barclays revised its stance on size, downgrading large-over-small to Neutral for the first time. “We prefer Tech and Small caps for their strong earnings momentum, while remaining cautious on Large ex-Tech due to weaker fundamentals,” the strategists wrote.
The bank’s economists now forecast three rate cuts this year and two more in 2026, adding further tailwinds to smaller, more domestically exposed companies.
Barclays also upgraded Value to Neutral and High Volatility to Positive, while downgrading Quality and Momentum to Negative.
The team said that riskier healthcare, tech, and cheap discretionary names powered small-cap gains, but warned that macro or inflation shocks could still unwind the rally.
“Small Caps benefit from improving profitability and attractive valuations. However, macro or inflation shocks could unwind recent gains - key risks to our tactical view,” the strategists said.