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Can Small-Cap Stocks Renew Their Momentum in 2024?

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U.S. small businesses are still suffering from high inflation and interest rate. The NFIB (National Federation of Independent Business) Small Business Optimism Index decreased marginally in February to 89.4 from 89.9 in January, marking the 26th consecutive month below the 50-year average of 98.

On the other hand, a survey by Goldman Sachs 10,000 Small Business Voices — a policy advocate for small business owners — revealed a relatively rosy picture. According to the survey, which was conducted in January, 75% of small business owners are optimistic about their financial well-being in 2024, up from 68% a year earlier.

The survey also showed that 28% of small business owners rated the economy as good or excellent, up 9% from a quarter ago. More than half of the respondents said they expect to create jobs this year, and 62% expect their profits to grow in 2024.

Meanwhile, on Feb 22, the CNBC|SurveyMonkey reported that the Small Business Confidence Index reached 47% in first-quarter 2024, marking its highest level since President Joe Biden took office.

The survey, which was conducted online between Jan 22 to Feb 1, revealed that 28% of small business owners describe the current state of the economy as “excellent” or “good,” up 25% sequentially and higher than 18% in the first quarter of 2023.

Robust U.S. Economy

Despite facing a 22-year high interest rate and elevated inflation, the fundamentals of the U.S. economy remain rock solid. The U.S. economy added 303,000 nonfarm jobs in March, well above the consensus estimate of 195,000.
The unemployment rate in March was 3.8% compared with 3.9% in February. Personal consumption expenditure — the largest driver of GDP — rose 0.8% month over month in February, compared with a 0.2% rise in January.

U.S. GDP rose 2.5% in 2023 compared with 1.9% in 2022. At the beginning of 2023, the consensus estimate for full-year GDP was 2%. On Apr 4, the Atlanta Fed GDPNow tracker forecast a 2.5% growth rate for first-quarter 2024, indicating, no chance of a near-term recession.

Peak Inflation Behind Us

Peak inflation is far behind us as the current inflation level is around 1/3rd of what it was in June 2022. The CME FedWatch currently shows a 51.3% probability of the first cut of the existing Fed funds rate in the June FOMC meeting.

On Apr 3, in a speech at Stanford University, Fed Chairman Jerome Powell reiterated that the central bank will start reducing the Fed fund rate at some point of time this year. However, he also cautioned that the time of the rate cut will depend on upcoming economic data, especially the inflation data.

Small Caps Likely to Regain Pace

Small-cap companies have suffered from record-high inflation, a soaring interest rate and fear of an impending recession. Further, small businesses are predominantly dependent on the domestic economy. They generally have very little access to export markets. Better-than-expected consumer spending has reduced the risk of a near-term recession.  

Sam Gutierrez, senior research scientist at SurveyMonkey, said “We’re kind of seeing a potential turn around the corner in terms of small business optimism.” The small-cap-centric benchmark — Russell 2000 — is up 3.4% year to date.

How to Select Stocks

We have selected small-cap (market capital < $1 billion) companies that have strong potential for 2024. Within these stocks, we have picked those that have seen positive earnings estimate revisions in the last 60 days. Finally, each of our picks sports a Zacks Rank #1 (Strong Buy).  You can see the complete list of today’s Zacks #1 Rank stocks here.

Five such small-cap stocks are - Universal Technical Institute Inc. (UTI - Free Report) , Diversified Energy Co. PLC (DEC - Free Report) , Regional Management Corp. (RM - Free Report) , Yext Inc. (YEXT - Free Report) and Interface Inc. (TILE - Free Report) .

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