LIVE MARKETS-RBC flags small-cap risk from homebuilder slump

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RBC FLAGS SMALL-CAP RISK FROM HOMEBUILDER SLUMP

Wall Street’s main indexes are poised for a subdued start to Tuesday’s session after logging a third straight day of record closing highs. Investors are now turning their attention to Federal Reserve Chair Jerome Powell’s comments due around noon.

Despite the market's record setting rally, a recent pullback in U.S. homebuilder stocks may be a red flag for small caps, said RBC Capital Markets's Head of U.S. Equity Strategy Research Lori Calvasina in a note on Monday.

The S&P 1500 Homebuilders sub-index .SPCOMHOME fell 1.7% on Friday and is now down more than 7% from its early-September peak. Calvasina notes that small caps and homebuilders stocks often move in tandem as both are seen as plays on potential Fed rate cuts.

But that correlation is starting to fray. While homebuilders have begun to underperform, the Russell 2000 continues to gain relative to the S&P 500.

"Valuations for the Household Durables industry (which includes homebuilders) lack appeal and earnings revisions have been weak," Calvasina says, citing a cautious view from its homebuilding analyst Mike Dahl.

The divergence may prompt investors to reassess trades tied to Fed easing, particularly amid persistent economic uncertainty, Calvasina added.

(Medha Singh)

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