Bank of America Strategist Says One Category of Stocks Outperforming the Market, Predicts Trend Will Continue if Fed Cuts Rates

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A Bank of America (BofA) strategist says one category of stocks may continue to outperform the market if one event occurs.

In a new interview on CNBC Television, Jill Carey Hall, BofA’s US equity strategist, says that small-cap stocks are likely to put up massive gains if the Fed cuts rates next month.

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“We had been cautious on small caps for a while, but at least near term we think the Russell 2000 is likely to outperform – at least through September if we do see a likelihood of a Fed cut. And that’s what [Fed chair Jerome] Powell signaled as a greater likelihood in the speech last week. The Russell 2000 has been extremely sensitive to interest rate expectations from the Fed over the last year or two. The stocks in the index have a lot of rate sensitivity, a high amount of refinancing risk and lots of leverage.”

Hall also says that small caps may continue to surge beyond next month if company earnings are better than expected when publicly-traded companies issue their quarterly financial reports in October.

“Fed cuts are good for small caps. Near term, the index is likely to outperform. But beyond September, a lot will depend on the earnings backdrop, because that’s been the other factor that’s held back small caps, is they’ve been stuck in this profits recession, and they finally just got out of that in the second quarter, but a year later than expected…

Earnings season is winding down right now, but once we get into October, we’re going to start another earnings season where we’ll get a better sense of tariffs and top-line trends, which have still been a bit weak for small caps. But as of right now, consensus is expecting a big pickup for profit growth in the second half.”