Good news for small caps!
My prediction, for what it is worth, remains that small-caps should outperform their large-cap brethren, and conditions appear supportive for the share prices of innovative companies with pricing power and growth until the beginning of 2026.
You can watch my video on the subject here and read another article here and a more recent article about the same topic here.
Sure, we’re in the midst of reporting season right now, and the focus will very much remain on earnings and idiosyncratic fundamentals. At the end of the reporting season, however, fund managers and analysts will look up from their microscopes to see what’s on the horizon, and that could be very good news indeed.
Overnight U.S. Federal Reserve Bank chair, Jerome Powell, hinted rather strongly that September 28, is a candidate for a rate cut! Yes, you heard right. Following two rate cuts in Canada and one in each of Sweden and Europe, the U.S. is motioning to markets and investors that the temperature is being lowered.
The Federal Reserve’s decision to leave rates on hold overnight focused less on maintaining the current rate and more on what Chairman Jerome Powell indicated about future moves, particularly the upcoming rate decision in 48 days.
During the post-meeting press conference, Powell emphasised that the committee believes the economy is approaching a point where reducing the policy rate might be appropriate.
The Fed’s statement highlighted that it remains “attentive” to risks related to both the labor market and inflation. But this marks a shift from the previous policy statement, which only mentioned concerns about inflation. The latest statement notes that “job gains have moderated,” contrasting with the earlier description of a “strong” labour market. It also acknowledged a rising unemployment rate, though it remains low. Meanwhile, inflation is described as “somewhat” elevated.
Financial markets are now nearly certain of a rate cut in September, with the CME’s FedWatch tool indicating a 100 per cent probability. There’s also a 12.3 per cent chance of a 50 basis point cut, and by the year’s end, there’s over a 70 per cent likelihood of rates dropping by at least 75 basis points, according to market pricing (which I should add has a track record of being ‘about 100 per cent’ wrong).
Nevertheless, the stock market responded positively to the news, with the S&P 500 rising by 1.6 per cent and the Nasdaq Composite by 2.6 per cent. In the bond market, Treasury yields fell, with the 10-year yield – a key rate influencing consumer loans like mortgages – decreasing by 4 basis points to 4.1 per cent.
Despite all the talk of market bubbles and economic recessions, as long as we have positive economic growth and disinflation combined, the stage is set for a rally in innovative small caps. As it takes years for a bull market to overcome scepticism and inertia, a fully-fledged bubble does not form until 2026, at which point positioning should always be reassessed.
Montgomery offers investors access to both the domestically focused Montgomery Small Companies Fund (minimum investment $25,000) and the globally-focused Polen Capital Global Small and Mid Cap Fund (minimum investment $25,000).
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
