LIVE MARKETS-With Fed cuts now likely, small caps could see further multiple expansion

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WITH FED CUTS NOW LIKELY, SMALL CAPS COULD SEE FURTHER MULTIPLE EXPANSION

The stronger likelihood of interest rate cuts from the Federal Reserve after last Friday's dour U.S. jobs reports suggests more multiple expansion may be in store for small-cap stocks, according to a note from BofA Securities Equity & Quant Strategist Jill Carey Hall.

She writes in a note Monday that, "small caps saw the most P/E expansion last month amid anticipation of Fed cuts plus better-than-expected earnings..."

The small-cap Russell 2000 .RUT jumped 7% in August compared with a 1.9% gain in the S&P 500 .SPX but the small-cap index is still underperforming the broader market for the year so far. The Russell 2000 is up just 6.8% for the year so far versus a 10.4% gain in the S&P 500 in that period.

Rate cuts are supportive for small-cap companies because of their debt loads.

But Carey Hall says tariff uncertainties and a "still-challenged" manufacturing picture remain risks for small caps.

Also, she writes that while small caps "could be the best-performing size segment near-term," the firm still sees value in mid-caps versus megacaps.

The Russell 2000 index was down slightly on Monday while the S&P 500 and Nasdaq .IXIC were higher.

(Caroline Valetkevitch)

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