One day doesn’t make a trend. But it’s hard to ignore the effect Fed Chair Powell’s comments made last Friday had on equities, particularly small-caps.
He noted inflation and unemployment data could be challenges and trade tariffs could be headwinds in their own right. Yet he implied rate cuts could soon be in the cards. That was enough to send the Russell 2000 Index higher by 3.92%. Those gains were slightly outpaced by the Invesco NASDAQ Future Gen 200 ETF (QQQS).
“The baseline outlook and the shifting balance of risks may warrant adjusting our policy stance,” said Powell. “It will continue to take time for tariff increases to work their way through supply chains and distribution networks. Moreover, tariff rates continue to evolve, potentially prolonging the adjustment process.”
Rate Cuts Could Ignite QQQS
Entering 2025, there was widespread thought small-caps were poised to snap out of a lengthy slumber against large-caps, owing to President Trump’s America First agenda. The line of thinking was sensible. That’s because smaller firms, including QQQS components, are often more domestically focused.
The reality has been different. Some market participants lay the blame at the Fed’s doorstep. That’s because the central bank hasn’t lowered rates this year. In other words, the upside delivered by QQQS last Friday is legitimate. And it could be the start of something more substantial.
“Small-cap stocks are also expected to benefit from lower rates. Smaller companies are more likely to hold floating-rate debt than larger competitors, making their margins more susceptible to compression when interest rates increase. For the same reason, they benefit more when rates decrease,” reported Colin Laidley for Investopedia.
Should the Fed oblige with monetary easing, QQQS could be one of the prime beneficiaries among ETFs with exposure to smaller stocks. That’s because the fund is heavily allocated to healthcare and technology stocks. In the small-cap space, those sectors are often homes to firms that need to raise capital. That’s something that’s punitive to do when rates are high. Additionally, some experts say refinancing risk for smaller companies is high today. That means some QQQS member firms could derive significant benefit from the Fed paring borrowing costs.
QQQS could have other tailwinds, including small-caps’ superior rates of earnings growth and the segment’s status as being underowned by professional investors. Regarding the latter point, if the Fed cuts rates and prompts advisors, fund managers and other pros to get into small-caps, QQQS could ride that wave higher.
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