What to watch
Investors like returns from SmallCap firms
Investors are paying a lot of attention to the smallest stocks on the market. These stocks’ moves are being used to track several larger trends afoot.
The S&P SmallCap 600 index, filled with shares of the companies with lower market values, has been turning it on compared with its large-cap brother, the Standard & Poor’s 500. The S&P SmallCap 600 index is up nearly 7% over the past three months, double the roughly 3% gain by the S&P 500 during that time.
The relative rally in shares of small companies is turning into a barometer on investors’ rising expectations the Federal Reserve might hike short-term interest rates as soon as September.
Small caps are benefitting because they’re less likely be bought by investors looking for outsized dividends. Just 52% of the S&P SmallCap 600 pay dividends, while 83% of the S&P 500 do, says Sam Stovall, U.S. equity strategist at S&P Global Market Intelligence. When there’s a fear interest rates will be on the rise, that makes dividend-paying stocks less attractive to investors. Small caps, therefore, are more cushioned from this.
Analysts see 2017 earnings per share gaining 35% for companies in the S&P SmallCap 600, blowing away the 14% expected earnings gain expected for the S&P 500.
Investors are also preferring small companies due to their lower exposure to overseas markets. That’s key if rates rise and the dollar gets stronger, which could hurt exporters.