The Stocks Leading This Year’s Rally Could Be the First Casualties of Higher Rates
The Russell 2000 is up 25 percent over 12 months.
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Small-cap stocks have almost nothing to show for the last four years before this one.
The Russell 2000 is up 28 percent since 2021 and nearly all of that arrived in the last 12 months. The rally priced in lower borrowing costs, but traders increasingly see the Fed hiking interest rates before 2027.
CME data shows roughly a two-in-three shot
CME data shows roughly a two-in-three shot of a rate hike this month, and markets took Kevin Warsh’s Jackson Hole speech with a hawkish bias.
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Smaller companies are more sensitive to benchmark interest rates than larger ones. Bank of America estimates that every 25 basis point hike knocks off about 2 percent Russell 2000 operating earnings.
Recent selling pressure already fits that pattern. Since Warsh spoke last week, the 2-year Treasury yield has climbed to its highest level since 2023 while the Russell 2000 has fallen more than 3 percent, a steeper drop than the S&P 500’s 1.3 percent.
That suggests the stocks that have led the rally this year could lose ground in the coming months, as I explained in a segment on The Street on Wednesday. Another telling sign of potential fragility is that unprofitable Russell 2000 names have outperformed the profitable ones in this rally.
Source: www.inc.com
