Under the expectation of a Fed rate cut, small-cap stocks have begun a "recovery rally". Analysts are recommending these stocks.

Recently, the focus of the US stock market has shifted from the "big seven" tech stocks to small-cap stocks. The S&P SmallCap 600 Index and the Russell 2000 Index have risen by 6% and 7% respectively in the past three months, although still lagging behind the nearly 9% increase in the Nasdaq 100 Index. With the Federal Reserve expected to cut interest rates next month, small-cap stocks are expected to gain more momentum. Francis Gannon, Co-Chief Investment Officer of Royce Investment Partners, said in an interview, "The breadth of the market rally is expanding, and investors must realize this." Gannon believes that value small-cap stocks will benefit the most from the rate cut. Small-cap companies, compared to large corporations, hold more floating rate debt, making the impact of rate cuts on their financing costs more direct. In addition, the stimulus and tax measures provided by the recently passed "big and beautiful" law in the US Congress may further boost the performance of small-cap companies. In terms of specific stocks, Gannon is optimistic about investment bank Evercore, believing that the company will continue to benefit from the IPO market recovery. He also favors industrial companies, including welding tool manufacturer ESAB Corp (ESAB.US) and air conditioning equipment manufacturer AAON, Inc. (AAON.US). In the consumer sector, his team holds outdoor products brand Yeti Holdings (YETI.US) and automotive parts retailer Advance Auto Parts (AAP.US). The Bank of America Corp strategy team also shares a similar view. Jill Carey Hall, their stock and quantitative strategist, stated in a recent report that the rate cut may lead to stronger short-term excess returns for small-cap stocks than historical levels, as they are more sensitive to interest rate changes. Hall emphasized that during a period of Fed easing, value stocks in the small-cap sector tend to outperform growth stocks, with high-quality targets outperforming high-risk companies. In terms of valuations, one of the highlights of small-cap stocks is their valuation advantage. The S&P 600 Index currently has a price-to-earnings ratio of around 17 times, nearly 30% lower than the S&P 500 level, which historically has only had a 25% discount. "If you dig deeper, you can still find value," said James Ragan, Director of Investment Research at D.A. Davidson Wealth Management. He pointed out that the Russell 2000 has a higher weighting in finance, industrial, and healthcare sectors, which still have investment appeal. Market participants generally believe that, beyond the "big seven" tech stocks, Broadcom Inc. (AVGO.US) and Palantir (PLTR.US), small-cap stocks are becoming a new investment stage. As the September Fed meeting approaches, if the rate cut materializes, the "counterattack" of small-cap stocks is expected to accelerate further.