One day doesn’t make a trend. But it’s hard to ignore the effect Fed Chair Powell’s comments made last Friday had on equities, particularly small-caps.
He noted inflation and unemployment data could be challenges and trade tariffs could be headwinds in their own right. Yet he implied rate cuts could soon be in the cards. That was enough to send the Russell 2000 Index higher by 3.92%. Those gains were slightly outpaced by the Invesco NASDAQ Future Gen 200 ETF (QQQS).
“The baseline outlook and the shifting balance of risks may warrant adjusting our policy stance,” said Powell. “It will continue to take time for tariff increases to work their way through supply chains and distribution networks. Moreover, tariff rates continue to evolve, potentially prolonging the adjustment process.”
Rate Cuts Could Ignite QQQS
Entering 2025, there was widespread thought small-caps were poised to snap out of a lengthy slumber against large-caps, owing to President Trump’s America First agenda. The line of thinking was sensible. That's because smaller firms, including QQQS components, are often more domestically focused.
The reality has been different. Some market participants lay the blame at the Fed’s doorstep. That's because the central bank hasn’t lowered rates this year. In other words, the upside delivered by QQQS last Friday is legitimate. And it could be the start of something more substantial.
“Small-cap stocks are also expected to benefit from lower rates. Smaller companies are more likely to hold floating-rate debt than larger competitors, making their margins more susceptible to compression when interest rates increase. For the same reason, they benefit more when rates decrease,” reported Colin Laidley for Investopedia.
