The stronger-than-expected December jobs report spelled trouble for small-cap stocks, according to strategists at Bank of America Global Research.
Economists at Bank of America Global Research said that they think the Federal Reserve’s interest-rate-cutting cycle is over, after they previously expected two more rate cuts of 25 basis points each in the first half of this year, Jill Carey Hall and Nicolas Woods, strategists at BofA, wrote in a Sunday note.
The Fed was one of the biggest drivers for small-cap performance last year, the strategists noted.
Though small caps have historically outperformed in the 12 months following the final rate cut in a cycle, most previous cutting cycles included a recession and a recovery phase, which was absent this cycle. Meanwhile, small caps were also cheaper at the end of historical cutting cycles than they are today, noted the strategists.
Bank of America estimated a 23% hit to the operating earnings of the Russell 2000, excluding financials, over a five-year period assuming that there will be no more rate cuts in the current cycle.