Strong US Economy and Interest rate Cut Bets Makes Case for Small Cap Stocks

Strong US Economy and Interest Rate Cut Bets Makes Case for Small Cap Stocks

Economists are overly optimistic about the US economy, buoyed by solid growth in the last quarter and the continued resilience of the labor market. Amid growing expectations of a soft landing and the US Federal Reserve cutting interest rates in June, economists expect the gross domestic product to expand by 2% this year, twice the pace expected as of the end of last year.

Expectations of the Fed cutting interest rates by up to four quarter points before year-end should support an economy that was starting to overheat. There have been growing concerns that the current interest rate environment at 22-year highs could pose significant risks to the extent of plunging the economy into recession.

Fed Chair Jerome Powell has already reiterated that interest rates will start coming down before year-end. “We think because of the strength in the economy and the strength in the labor market and the progress we’ve made, we can approach that step carefully and thoughtfully and with greater confidence,” Powell said while appearing at Capitol Hill.

Amid the interest rate cut prospects, equity markets have been on a roll for the year. While the artificial intelligence frenzy has significantly pushed equities higher, it is expected that the US economy will stay clear of a recession that has helped fuel the rally.

However, there are growing risks of the Fed holding interest rates higher for longer should the economy continue enduring strength. According to Ellen Zentner, chief US economist at Morgan Stanley, more robust growth could lengthen the runway for the Fed to act.

For starters, a recent month-on-month increase in the personal consumption expenditure index and substantial job numbers have reiterated the booming economy. However, it does not mean the stronger economy will deter the Fed from cutting interest rates. Inflation edging below the 2% threshold is the main thing that should sway the central bank into cutting interest rates.

The Fed cutting interest rates should be a boon to the equity markets that have been edging higher even with the high-interest rates. While valuation levels have gotten out of hand following the Bull Run, now may be the best time to take a closer look at some of the best small-cap stocks with solid growth prospects.

High growth small cap stocks are well positioned to benefit from the economy holding steady and the Fed cutting interest rates. While the focus is usually on mega-cap stocks such as Apple, Nvidia, and Microsoft, small-cap stocks offer an ideal way of gaining exposure to some burgeoning sectors at highly discounted valuations.

A small-cap company has a market capitalization between $300 million and $2 billion. Most are usually young companies with significant growth potential and are less stable than their large-cap counterparts. While such stocks tend to be highly volatile, they are more likely to outperform large-cap stocks in the long run.

CarParts.com

Operating as an online aftermarket auto parts and accessories provider, CarParts stands out as one of the best small-cap stocks. Despite underperforming in recent years, the company’s outlook looks solid under new management.

It has moved to consolidate its web brands and streamline its business as it looks to return to growth. Likewise, the company is investing in technology and marketing as it looks to add to its distribution centers. The continued shortage of semiconductors in the auto manufacturing industry presents unique opportunities for increased used car sales.

CarParts targets sales growth upwards of 25% and EBITDA growth of 10%, underlining its focus on generating long-term value.

89bio

89bio is one small-cap biotechnology stock that’s showing signs of breaking out. The company has carved a niche in developing treatments for liver diseases and other ailments. The company’s lead product is pegozafermin, which is being developed for the treatment of nonalcoholic steatohepatitis.

After immense pressure last year, the small-cap stock is already up by more than 5% for the year amid renewed investor interest. Its shares are rated as an average buy with a $30 price target implying over 100% upside potential.

Alarum Technologies Ltd

Alarum Technologies is a small-cap company for investors eyeing exposure in the technology sector at a cheap valuation. The company increasingly makes a name for itself by developing cybersecurity and privacy solutions for US, UK, and Israeli consumers.

After rallying by over 200% last year, the stock is already up by more than 40% for the year, outperforming the tech-heavy NASDAQ index by about 7% over the same period. The rally comes on the global internet access provider and web data collection solutions launching a new innovative website unlocker.

ACM Research

While the focus has been on the semiconductor companies amid the artificial intelligence frenzy, ACM Research promises exposure in the sector. The small-cap company, with its subs small-cap, manufactures and sells single single-warning equipment for enhancing chip manufacturing processes.

The US-based company carries most of its operations in China, exposing it to one of the biggest markets. Likewise, it is billed as a small company with high growth potential and solid profitability amid the AI boom.

GigaCloud Technology

GigaCloud Technology is another exciting small-cap stock operating as a software infrastructure company. It specializes in developing and providing end-to-end B2B e-commerce solutions for large parcel merchandise. Its platforms are commonly used to execute cross-border transactions across furniture, home appliances, fitness equipment, and other large parcel categories.

It’s turning out to be a high-growth stock after more than doubling in value recently. While the stock has pulled back, it remains an exciting play for gaining exposure in the technology sector.

Root Inc

Root Inc. is a financial services company that provides insurance products and services across the United States. It mainly offers automobile, homeowners, and renter’s insurance products. The stock has been edging higher on the company, delivering strong financial results on revenue growth and affirming strong demand for its products.

It remains a solid small-cap play as it acquires customers through mobile apps, making it possible to gain market share from big insurance companies.

Perion network

Perion Network is a communication services company providing digital advertising solutions to brands, agencies, and publishers. It also includes content monetization, platform search monetization, and website monetization solutions.

The Israeli-based company, which focuses on connecting advertisers and publishers, is well-positioned to benefit from a booming economy characterized by increased spending on advertising. The fact that it counts Microsoft as one of its biggest partners underscores its reputation in the industry. The company has been growing through acquisitions to strengthen its edge on premium ads.

Eyepoint Pharmaceuticals

Eyepoint Pharmaceutical is a clinical-stage biopharmaceutical company that develops and commercializes therapeutics that improve the lives of people with retinal diseases. Its pipeline of products leverages proprietary bioerodible Durasert E technology for sustained intraocular drug delivery.

After rallying by more than 500% last year, the stock is already up by more than 20% for the year. The stock’s sentiments were boosted when the company announced positive data for a macular degeneration treatment. The condition is a leading cause of blindness or vision loss for people over 60 years.

The ReelShares Growth Equity Fund is one of the best funds for investors looking to gain exposure to a diverse range of small cap products domestically and overseas. The fund focuses on building a portfolio tailored to deliver long term capital growth while investing at least 80% of its assets in equity securities and the remaining 20% in fixed-income securities

For the initial investment, investors can purchase shares of Reel Shares Growth Equity Fund RELPV directly from Reel Shares or through its financial intermediaries.

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