Jefferies: The Federal Reserve's interest rate cuts may reshape the U.S. stock market landscape, with small-cap stocks likely to outperform large tech stocks

According to the Zhitong Finance APP, investment bank Jefferies stated that as the Federal Reserve approaches interest rate cuts, the U.S. stock market may see a shift where small-cap stocks outperform large technology stocks. Andrew Greenebaum, Senior Vice President of Equity Research Product Management at Jefferies, pointed out that data since 1990 shows that during periods of Federal Reserve rate cuts, the S&P 500 equal-weight index outperforms the market-cap weighted S&P 500 index. Specifically, data compiled by Jefferies indicates that in the last four rate-cutting cycles, the S&P 500 equal-weight index averaged a 0.6% lead over the S&P 500 index in one-year performance, about 4% in two-year performance, and an average lead of 12.5% in four-year performance. Andrew Greenebaum stated that the current potential rate cuts by the Federal Reserve may occur after "overcrowded" trading has pushed the weight of technology stocks in the S&P 500 index to new highs. He added, "We are not suggesting that technology stocks will plummet or experience a severe sell-off, but a dovish Federal Reserve often triggers changes in market dynamics, regardless of whether the overall index is high or low. Therefore, if last Friday's non-farm payroll data tells us anything, it is that now may be the time to start pulling funds out of large technology stocks." In Andrew Greenebaum's view, this is less of a tactical judgment and more of a long-term perspective, as value stocks and small-cap stocks typically outperform the market over many years. Data shows that so far this year, technology stocks have continued to lead, with the information technology sector of the S&P 500 rising 13% driven by optimism around artificial intelligence. In contrast, the overall S&P 500 index has risen 7.6%, while the S&P 500 equal-weight index has only risen 4.9%. However, this market dynamic may change due to the employment data released last Friday. The data showed that the U.S. added only 73,000 non-farm jobs in July, far below market expectations, and the non-farm job additions for May and June were significantly revised down. Signs of a softening job market have raised expectations for Federal Reserve rate cuts. Federal Reserve fund futures indicate a 95% probability that the Federal Reserve will cut rates by 25 basis points at the September policy meeting, and the market has almost fully priced in the possibility of three rate cuts by the Federal Reserve before the end of January next year. The U.S. stock market's reaction to this data and the subsequent changes in interest rate expectations indicate that even in an overall market downturn, small-cap stocks may perform better. Last Friday, the Nasdaq 100 index fell 2%, and the S&P 500 index fell 1.6%. In contrast, the S&P 500 equal-weight index fell by 1%. Jefferies' strategists also pointed out that another reason small-cap stocks may outperform the market is that their trading is less crowded and their valuations are lower compared to large companies. Among the S&P 500 constituents, the median price-to-earnings ratio of the top 10% most expensive stocks is currently 36 times, while the median price-to-earnings ratio of the bottom 10% cheapest stocks is 10 times The gap between the two is 26 times, placing it at the 87th percentile level since 2009. Andrew Greenebaum stated, "There are indeed more downside risks for overcrowded tech stocks." BCA Research echoed Jefferies' viewpoint on Monday, downgrading tech stocks to "neutral." The company's Chief U.S. Equity Strategist, Irene Tunkel, stated in a report, "After a strong rally, it's time to cut profit positions and manage downside risks." She added that the current market is priced for "perfect expectations," and any bad news could have a disproportionate impact on performance. Of course, the fundamentals of large tech stocks remain strong. Data shows that the communication and technology sectors are currently delivering the strongest earnings growth and have achieved the most significant earnings surprises in this earnings season