Broad gauges of small-cap stocks aren’t impressing on a year-to-date basis. But there are some signs of life. Over the past month, the widely followed S&P SmallCap 600 Index is up 2.09%. That move significantly pared the index’s 2024 loss.
At the sector level, that momentum is more dispersed. That is to say some small-cap sectors are outperforming or lagging the SmallCap 600 Index. For now, the Invesco S&P SmallCap Information Technology ETF (PSCT) is lagging the broader benchmark on a year-to-date basis. But the exchange traded fund is higher over the past month.
Whether that’s the start of something more substantial remains to be seen. But for investors considering small-cap sector-specific exposure, PSCT could be an ETF to watch in the coming months. One reason is the possibility of lower interest rates. That’s of particular importance to smaller tech firms with longer-dated cash flows.
Fed Pivot Could Support Small-Cap ETF PSCT Gains
It’s arguably notable that PSCT trended modestly higher over the past month because that time frame included speculation that the Federal Reserve is unlikely to reduce borrowing costs at its meeting later this month. Still, a “Fed pivot” could be meaningful to PSCT member firms.
“We think the central bank is likely to open the door to possible rate cuts, with recent economic data pointing to moderating inflation and a gradually cooling labor market. Since nearly half of the debt held by Russell 2000 companies is floating rate, versus around a tenth for large-cap companies, Fed rate cuts can quickly start to reduce interest expenses for small-cap companies,” noted UBS Chief Investment Officer Kiran Ganesh.
PSCT follows the S&P SmallCap 600 Capped Information Technology Index, not the Russell 2000. But the Invesco ETF and the small-cap index have 57 overlapping holdings, and 93.4% of PSCT member firms are also Russell 2000 holdings.
Another potential driver for PSCT this year is the expectation that small-cap earnings growth will be sturdy and possibly exceed that of large-caps on a percentage basis.
“Swings in earnings are typically more pronounced for small-caps compared to large-caps. At present, this is a positive for more modestly-sized companies,” concluded Kiran. “We think low-double-digit earnings growth is likely for the S&P 600 small-cap index this year, based on our 8% growth forecast for the S&P 500. This marks a substantial improvement from the roughly 10% decline in S&P 600 profits in 2023.”
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