Post-Fed boost for small-cap stocks may be limited
gotten (price-to-earnings) expansion, so you need growth.”
Fourth-quarter earnings for companies in the small-cap S&P 600 .SPCY were down 1.0 per cent from a year ago, while the benchmark S&P 500’s earnings . SPX rose 7.8 per cent, Thomson Reuters data show.
Analysts expect profit growth for the S&P 600 in the first quarter of 2017, but at a rate still well below that multiple earnings of the S&P 500. The S&P 600 is up just 1.4 per cent since December 31, after rising 24.7 per cent in 2016. The S&P 500 by comparison has gained 6.2 per cent since the start of the year.
At 20.4 times forward earnings estimates, the S&P 600 looks expensive compared with its longterm average of 17, Thomson Reuters data showed. The S&P 500 trades at about 17.8 times forward earnings, also above its long-term average.
The Russell 2000, a widely used gauge for small-caps, has a forward price-to-earnings ratio of 25.4, brushing against its highest level since 2009. Its 10-year average sits at 20.7.
“Growth and the interest rate trajectory are going to be two key factors,” said Dan Suzuki, senior US equity strategist at Bank of America Merrill Lynch in New York. He thinks small caps may have more room to gain in the short run, especially if earnings surprise to the upside, but that valuations remains a negative.
On the flip side, rising rates also tend to boost the US dollar, which would have a bigger negative impact on large-cap multinationals as a stronger dollar weighs on offshore revenues when they are translated into the US currency.
Investors also worry that any tax reductions under the Trump administration may not come for many months, or even until 2018.
“Small-caps generally pay more in terms of US corporate taxes,” said Nicholas Colas, Chief Market Strategist at Convergex, a global brokerage company based in New York.
“You can somewhat view small- caps as a bit of a proxy for confidence in the tax reduction piece of the Trump economic plan.”
US stocks were little changed on Friday as a slide in Amgen dragged down the healthcare sector, offsetting gains in technology shares.
The S&P 500 healthcare sector was off 0.4 per cent, dragged down by a 6.3 per cent drop in Amgen. Analysts said data from a large study testing the impact of Amgen’s cholesterol drug on the heart was weaker than expected.
Amgen was also the biggest drag on the broader S&P 500 index and the Nasdaq.
However, ten of the 11 major S&P 500 sectors were higher, with the technology sector up 0.21 per cent.
Adobe gave the biggest push to the sector, rising 6.2 per cent after the Photoshop maker’s quarterly results beat analysts’ expectations.
Much of the week’s trading has been predicated on a widely expected quarter-point interest rate hike that the Federal Reserve delivered on Wednesday.
The main indexes are on track to mark slight gains since Monday as markets rallied on the Fed’s less hawkish-than-expected rate hike outlook.
Investors are also keeping a close eye on the Group of 20 meeting in Germany, where financial leaders and central banks discuss the world economy. — Reuters