Shahrir Maulana
Morgan Stanley analysts favor growth over value in small-cap stocks (IWM).
Small Cap Growth (NYSE:ITThe company has outperformed small-cap value stocks (IWN) due to falling interest rates. This is because small-cap stocks with longer durations have longer-term growth and sensitivity to risk. Historically, the cost of capital has benefited from falling yields on a relative basis.
On the other hand, economically sensitive small-cap stocks (such as value small-cap stocks) do not, since lower interest rates mean slower growth and pricing power.
“we believe [small cap growth] There’s more room for relative upside on the back of earnings revisions [them]”History shows that when the Fed starts cutting interest rates, small-cap stocks typically outperform,” strategist Michael J. Wilson said in a U.S. Equity Strategy note.
The tech bubble period was an exception. Then, as the Federal Reserve cut interest rates, small-cap growth stocks lagged small-cap value stocks.
Additionally, biotech stocks have the largest weighting in the Russell 2000 Growth Index (IWO) and have a track record of strong relative performance after the Federal Reserve cuts interest rates.
