Capital Economics projected today that US equities are set for a rebound, with a particular emphasis on growth and cyclical stocks. This forecast comes after a notable decline in small-cap stocks, as reflected by the Russell 2000 index, which experienced a sharper fall compared to its large-cap counterpart, the S&P 500, following the robust US payroll report released last Friday.
Capital Economics noted that the recent drop in the Russell 2000 index by approximately 3%, which was greater than the S&P 500's fall of around 2%, mirrors the short-lived market rotation observed in July. Small-cap stocks have shown heightened sensitivity to Federal Reserve policy expectations, which have shifted in response to the enduring strength of the US economy.
The firm expects that the recent downturn in US equities is temporary and predicts a forthcoming recovery. They anticipate that the 10-year Treasury yield will decrease slightly, but large-cap growth stocks and those in cyclical sectors will continue to lead the market.
This outlook is based on the firm's analysis of market trends, including the performance of the S&P 500 relative to the Russell 2000 over the majority of 2024 and the superior performance of growth stocks over value stocks and cyclical sectors over defensive ones throughout the year.
Capital Economics suggests that the current equity market slump, especially among large-cap and cyclical growth stocks, is partially a correction following a strong rally, rather than solely a consequence of rising yields.
The firm points out that a robust labor market is generally beneficial for equities and highlights that since mid-September, equity prices, particularly in growth and cyclical stocks, have risen in conjunction with the 10-year Treasury yield. This coincided with an improvement in US economic data and increased chances of Donald Trump becoming president.
Moreover, despite recent pressures from climbing yields since early December, cyclical sectors, especially big-tech, have largely maintained their gains from the onset of the so-called Trump trade.
Capital Economics concludes that these sectors are likely to persist as market leaders into 2025, driven by ongoing enthusiasm around artificial intelligence advancements.
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