Prologis: Lack of official data may put the Federal Reserve in a dilemma, maintaining a balanced view on small-cap stocks

According to the Zhitong Finance APP, Thomas Poullaouec, Head of Global Investment Solutions (Asia-Pacific) and Fund Manager at Pictet, along with the Pictet Asia Investment Committee, has released the latest global asset allocation views. It points out that, aside from the negative impact on the economy caused by the U.S. government shutdown in the longer term, the lack of official data will continue to pose challenges for the data-dependent Federal Reserve. Additionally, the recent interest rate cuts by the Federal Reserve have reignited market interest in small-cap stocks, but inflation may keep interest rates elevated, coupled with a weak job market that could lead to a slowdown in growth, suggesting a balanced view on small-cap stocks.

The view indicates that the Federal Reserve's first interest rate cut since pausing rate hikes at the end of last year has heightened market focus on the job market. August data showed that employment began to grow again, with the unemployment rate exceeding a four-year high of 4.3%. Investors are closely watching the September data, but the relevant data will be delayed. Revisions to last month's data indicate a reduction of 910,000 jobs in employment growth from April 2024 to March 2025, adding to investor concerns and questioning the reliability of the data.

In the absence of official data, market data has become increasingly important. The ADP report for September showed a reduction of 32,000 jobs in the employment sector, further deepening market concerns about the job market. In this context, the timing of data releases is becoming longer, making it more likely that more concerning data will emerge.

In recent years, expectations of interest rate cuts have repeatedly driven interest in small-cap stocks, allowing them to outperform large-cap stocks for a time, but unfortunately, these gains have not been sustained. The recent interest rate cuts by the Federal Reserve have rekindled market interest in small-cap stocks, which have outperformed large-cap stocks by nearly 4% since the low in April, with most of the gains occurring in August. Although relative valuations still hold an advantage and earnings expectations for small-cap stocks have improved, inflation may keep interest rates elevated, along with a weak job market that could lead to a slowdown in growth, suggesting a balanced economic view.

Based on expectations of Federal Reserve interest rate cuts, increased merger and acquisition activity, and a more relaxed regulatory outlook, Pictet has increased its allocation to U.S. small-cap stocks to neutral. This adjustment has shifted Pictet's allocation to U.S. large-cap stocks (relative to U.S. small-cap stocks) to neutral, resulting in an overall high level of equity allocation. Pictet is also leaning towards growth stocks (relative to value stocks), as the macro environment continues to favor the artificial intelligence/technology sector, especially in the U.S. market.

Pictet maintains an underweight in bonds, as inflation and financing demands from U.S. fiscal stimulus may keep interest rates under pressure, particularly long-term rates. It maintains an underweight in U.S. long-term Treasuries, as the long end of the yield curve is more susceptible to upward pressure from U.S. government fiscal financing needs. Additionally, the allocation to cash is diluted to neutral, to be used for allocating to U.S. small-cap stocks. Cash can provide liquidity to seize opportunities arising from market mismatches