Asia stocks: Japan, S. Korea hit record highs amid Fed easing bets; China dips
Investing.com -- A weaker U.S. jobs picture and falling bond yields have set the stage for a market rotation out of megacap growth and into small caps, according to Raymond James.
The firm noted that “10-year yields [were] down a whopping 15 bp on a very weak jobs print in August and a revision to June jobs that took it negative for the first time since 2020.”
They added that payroll growth appears to have slowed from around 150,000 a month in 2024 to “0–50K/month” this summer. That backdrop, Raymond James said, “likely guarantees 25 bp on September 17 by the Fed, and maybe 50 bp.”
Against this softer macro backdrop, rate-sensitive segments of the market have gained traction.
“The rotation away from AI and into small caps (rate sensitive), and broader equity market participation [continued] last week,” Raymond James wrote.
The reasoning is said to be straightforward: “~50% of the difference in earnings trend between large caps and mid/small-caps since 2022 has been related to small/mid-caps immediately feeling the impact of higher rates.”
“As rates come down, this reverses partially, making the strength in small/mid-caps relative to large caps as rates move lower completely logical.”
While yields have dipped, the firm warned that Treasury market consensus has often been wrong.
“Since 2022, the 10-year Treasury yield has increased above 4.5% four times,” said Raymond James. “Here we are approaching 4%. It’s getting pretty consensus.”
The firm believes that if growth picks up into 2026, yields could head back to 4.5%.
Still, for now, falling yields and a soft jobs market are favouring small caps. “No real pullback so far, and all remain above 50/200 DMA,” Raymond James noted, highlighting the durability of the rotation.