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Is This the Small Cap Rotation We’ve Been Waiting For?

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Scott Herrick

Scott Herrick

Client Portfolio Manager, Small Cap Growth

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Small cap growth stocks have been trading at a big valuation discount to their large cap growth peers for some time, but the gap started to narrow after the July 11 CPI print raised the prospect of rate cuts. Are you positioned for a potential rotation?

After the release of June’s weaker-than-expected inflation numbers (CPI fell 0.1%),1 the potential for Fed rate cuts grew more likely—and small cap stocks reacted positively. Investors rotated toward cyclical, interest rate sensitive small cap growth names, and small cap growth outperformed large cap growth by over 500 basis points in just one day.2

Is this the rotation we’ve been waiting for? We can’t know for sure, but we’ve been anticipating this move for some time. And when small caps move, they move fast!

Time may still be on your side, however, because small cap stocks continue to look cheap, relatively speaking:

  • Small cap growth ended June at a 37% valuation discount to large cap growth.3 
  • The Russell 2000 Growth Index is trading 17% below its high-water mark of 1726 set in February 2021 (see chart), while large cap indexes are near record highs.

As we’ve said for several quarters, we believe the setup for small cap growth stocks is compelling—but you need a small cap allocation before you can participate in any potential upside. Take a look at your portfolio. Will you be well-positioned if the market continues to rotate to small cap stocks?

Small cap growth trading well under Feb. 2021 high
Russell 2000 Growth Index (01/01/21-07/15/24)
Small cap growth trading well under Feb. 2021 high

As of 07/15/24. Source: FactSet. Chart shows closing prices. Feb. 2021 high of 1726 was intra-day high. See index information at the end of this document.

A note about risk

The principal risks are generally those attributable to investing in stocks and related derivative instruments. Holdings are subject to market, issuer and other risks, and their values may fluctuate. Market risk is the risk that securities or other instruments may decline in value due to factors affecting the securities markets or particular industries. Issuer risk is the risk that the value of a security or instrument may decline for reasons specific to the issuer, such as changes in its financial condition. More particularly, the strategy invests in smaller companies which may be more susceptible to price swings than larger companies because they have fewer resources and more limited products, and many are dependent on a few key managers.

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Voya Small Cap Growth Fund

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1 Bureau of Labor Statistics (BLS) as of 07/11/24.
2 FactSet as of 07/11/24. Small cap growth represented by the Russell 2000 Growth Index. Large cap growth represented by Russell 1000 Growth Index. See index information at the end of this document.
3 FactSet as of 06/30/24.

An investor cannot invest directly in an index, and index performance does not reflect the deduction of any fees, expenses or taxes. Index comparisons have limitations, as volatility and other characteristics may differ from a particular investment. The Russell 2000 Growth Index measures the performance of the small cap growth segment of the U.S. equity universe. The Russell 1000 Growth Index measures the performance of the large cap growth segment of the U.S. equity universe.

Past performance does not guarantee future results. This market insight has been prepared by Voya Investment Management for informational purposes. Nothing contained herein should be construed as (i) an offer to sell or solicitation of an offer to buy any security or (ii) a recommendation as to the advisability of investing in, purchasing or selling any security. Any opinions expressed herein reflect our judgment and are subject to change. Certain statements contained herein may represent future expectations or other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (1) general economic conditions, (2) performance of financial markets, (3) interest rate levels, (4) increasing levels of loan defaults, (5) changes in laws and regulations and (6) changes in the policies of governments and/or regulatory authorities. The opinions, views and information expressed in this commentary regarding holdings are subject to change without notice. The information provided regarding holdings is not a recommendation to buy or sell any security. Fund holdings are fluid and are subject to daily change based on market conditions and other factors.

 

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