Lukewarm inflation numbers could be exactly what small-cap companies need to ignite a rally. With the S&P 500 continuing to hit records, it’s only a matter of time until small-cap companies follow suit.
Lower-than-expected inflation numbers should help quell the higher-for-longer narrative, paving the way for rate cuts to finally happen. With all the fanfare flowing into big tech, small-cap companies could finally have their proverbial day in the sun as investors look for other avenues for gains should their bigger cap counterparts start to look expensive.
“Market participants were relieved that the PCE inflation data did not come in hotter than expected,” The Street confirmed. “The data were very close to the published estimates, and that was good enough to create an open gap. There is now a slight uptick in expectations for a Fed rate cut in June, but it is still close to a coin flip at 55%.”
A data-dependent Fed will certainly use the latest personal consumption expenditures (PCE) price index as a gauge on whether it’s time to start loosening monetary policy. A CNBC report noted that the latest reading for January was its lowest since February 2021. So that could be an early impetus for rate-cutting to take place.
“Overall, [the report]is meeting the expectations, and some of the worst fears in the market weren’t met,” said Stephen Gallagher, chief U.S. economist at Societe Generale. “The key is we’re not seeing the broad nature of increases that we had been more fearful of.”
Get Ahead of a Small-Cap Rally
In the meantime, small-caps could be offering prime value. Investors can take advantage ahead of a rally following rate cuts. If so, they may want to consider the ALPS O’Shares US Small-Cap Quality Dividend ETF (OUSM).
This particular fund will comb the small-cap universe with a discerning filter that focuses on quality. OUSM seeks to track the performance of the O’Shares U.S. Small-Cap Quality Dividend Index (OUSMX).
The index is designed to provide cost-efficient access to a portfolio of small-cap, high-quality, low volatility, dividend-paying companies in the U.S. selected based on fundamental metrics. Those include quality, low volatility, and dividend growth. Given this index exposure, ETF investors only get quality names in the small-cap universe. That potentially provides future upside at the current low valuations.
The fund also offers sector diversification, eschewing a heavy focus on technology names. Instead, the sector breakdown tilts toward industrials, consumer discretionary, and financials.
VettaFi LLC (“VettaFi”) is the index provider for OUSM, for which it receives an index licensing fee. However, OUSM is not issued, sponsored, endorsed, or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of OUSM.
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