Title: US Small-Cap Stocks Face Debt Mountain, Await Fed Signal to Entice Investors
In a recent report by Bloomberg, it was revealed that US small-cap stocks are currently trading at their cheapest levels in decades. However, despite the attractive valuations, investors are hesitant to jump in due to the looming threat of a more than half-trillion dollar debt burden over the next five years.
According to data compiled by Bloomberg, firms in the small-capitalization Russell 2000 Index hold a total of $832 billion in debt, with 75% of that amount needing to be refinanced by 2029. This is in stark contrast to companies in the big-cap S&P 500 Index, which have only 50% of their obligations due by then.
Marija Veitmane, senior multi-asset strategist at State Street Global Markets, expressed caution, stating, “No, despite attractive valuations, we won’t be buying yet. We don’t like small caps as they are much more sensitive to an economic slowdown, have much higher cost of funding, and margins are likely to be squeezed more.”
One of the key concerns for small-cap companies is their reliance on floating-rate debt, which can lead to higher interest expenses when the Federal Reserve hikes rates. This, coupled with the fact that small companies are more dependent on economic conditions, has made investors wary of taking on the risk associated with small-cap stocks.
The Russell 2000’s price-to-sales ratio relative to the S&P 500 is near its lowest levels since 2003, excluding the pandemic-induced bottoming out in 2020. However, market participants believe that the index is priced for perfection and will require a significant pickup in economic growth to trigger a rally.
Despite the challenges facing small-cap stocks, some market forecasters remain optimistic. David Lefkowitz, head of US equities at UBS Global Wealth Management, sees falling interest rates by the end of the year supporting the group, and an expected pickup in business activity translating into stronger earnings.
Overall, the future of US small-cap stocks remains uncertain, with investors awaiting a clear signal from the Federal Reserve before making any significant moves. As the market continues to navigate economic uncertainty and inflation concerns, the fate of small-cap stocks hangs in the balance.
