Rally

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 Neither the author, Tim Fries, nor this website, The Tokenist, provide financial advice. Please consult our&nbsp;<a href="https://tokenist.com/terms-of-service/" style="text-decoration:underline;color:#3c7b7b" target="_blank" rel="noreferrer noopener" class="deco-link">website policy</a>&nbsp;prior to making financial decisions.
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<p class="has-drop-cap">The S&amp;P 500 <a href="https://tokenist.com/after-novembers-rally-the-spx-is-only-2-below-its-2023-intraday-high/" rel="dofollow" class="deco-link">staged an impressive rebound</a> in 2023, but its better-than-expected performance is largely attributed to the biggest US stocks. Meanwhile, small-cap stocks have underperformed their giant peers due to higher interest rates. With a recent <a href="https://tokenist.com/spx-spikes-1-4-as-fed-pivot-sparks-market-optimism/" rel="dofollow" class="deco-link">dovish pivot by the Federal Reserve</a>, small-cap stocks are trading at notable discounts, and next year could be their time to shine.&nbsp;</p> 
<h3 id="small-cap-stocks-trading-at-a-30-discount">Small-cap Stocks Trading at a 30% Discount</h3> 
<p>Small-cap stocks have witnessed a massive spike over the past week, with the Russell 2000 index surging more than 6.3% since the Fed confirmed its plans for a dovish pivot in 2024.</p> 
<p>The surge propelled Russell 2000 – a market index that tracks 2,000 small-cap US-listed stocks – near its 2023 peak of $2,000 on Thursday before witnessing a pullback. Still, despite recent surges, the index is up only 13% year-to-date, underperforming the 24% gained by the S&amp;P 500.</p> 
<p>The reason behind its underperformance is that the bulk of gains seen by the broader stock market this year were <a href="https://tokenist.com/70-of-the-stock-market-gains-this-year-come-from-the-magnificent-seven/" rel="dofollow" class="deco-link">fueled by the Magnificent Seven</a>, the world’s biggest tech company.&nbsp;</p> 
<p>As a result of this discrepancy, market strategists believe small-cap stocks are currently trading at very appealing valuations. Despite their significant gains in recent weeks, small-cap equities are sitting at a 30% discount to their large-cap peers based on analysts’ projections for corporate earnings in 2024, <a aria-label="said Michael Wilson (opens in a new tab)" href="https://www.morningstar.com/news/marketwatch/20231218214/one-of-wall-streets-biggest-bears-says-the-fed-is-giving-investors-a-good-reason-to-be-bullish-in-2024" target="_blank" rel="noreferrer noopener nofollow" class="deco-link">said Michael Wilson</a>, Morgan Stanley’s top equity strategist.&nbsp;</p> 
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<h3 id="are-small-cap-stocks-positioned-for-a-rally-in-2024">Are Small-Cap Stocks Positioned for a Rally in 2024?</h3> 
<p>The Fed’s recently announced dovish pivot made a massive impact. Although investors hoped the central bank would begin cutting rates next year, the official confirmation brought a fresh wave of optimism.&nbsp;</p> 
<p>As such, if the Fed successfully orchestrates the much-discussed “<a aria-label=" (opens in a new tab)" href="https://www.nytimes.com/2023/12/14/business/economy/jerome-powell-soft-landing.html" target="_blank" rel="noreferrer noopener nofollow" class="deco-link">soft landing</a>” for the US economy, small-cap stocks and other underperformers could be poised for a considerable rebound. As mentioned earlier, the Fed’s switch to a dovish stance will be the primary catalyst if that happens.</p> 
<p>Small-cap stocks are typically more sensitive to interest rate changes and gloomy economic outlooks, and given that rates are sitting at 22-year highs, their underperformance so far is hardly surprising.&nbsp;</p> 
<p>Following the “everything rally” that began in early November, their day in the sun may be on the horizon.&nbsp;</p> 
<blockquote class="wp-block-quote"> 
 <p>“If inflation stabilizes at a higher level, small-caps/cyclicals/lower quality stocks could be beneficiaries. Of course, this is a fine line with inflation statistics still running above target. Should these numbers start to rise again, the Fed could reverse course. Right now though, we could be entering a sweet spot that supports this rotation if nominal growth accelerates.”</p> <cite>– said Wilson. </cite>
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<p>Tom Lee, former JPMorgan’s chief equity strategist and co-founder of Fundstrat Global Advisors, <a href="https://finance.yahoo.com/news/wall-street-bull-called-stock-181801753.html" target="_blank" aria-label=" (opens in a new tab)" rel="noreferrer noopener nofollow" class="deco-link">shares this sentiment</a>. The veteran analyst, bullish on the S&amp;P 500’s performance in early 2023, said investors should look to smaller companies for outperformance in 2024.&nbsp;</p> 
<p>“In the next 12 months it seems like small-caps can be up 50%,” he told CNBC Friday. The strategist added this bull run could take the Russell 2000 index to a whopping 3,000 by year-end.</p> 
<p>Lee, convinced that inflation is now under control, said small-caps had been hit the hardest by substantial borrowing costs, arguing that an expected shift in monetary policy should be a boon for these assets.&nbsp;</p> <iframe src="https://tokenist.substack.com/embed" width="100%" height="320" style="border:1px solid #EEE; background:white;" frameborder="0" scrolling="no"></iframe> 
<p><em><strong>Do you agree with analysts’ views that small-caps could witness significant interest next year? Let us know in the comments below.&nbsp;</strong></em></p> 
<p>The post <a rel="nofollow" href="https://tokenist.com/us-small-caps-are-trading-at-a-historic-discount-could-they-rally-in-2024/">US Small Caps are Trading at a Historic Discount; Can they Rebound in 2024?</a> appeared first on <a rel="nofollow" href="https://tokenist.com">Tokenist</a>.</p>

US Small Caps are Trading at a Historic Discount; Can they Rebound in 2024?

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