U.S. small-cap stocks have surged to near record highs following Donald Trump’s presidential election win, but some investors are wary of chasing the rally as they fear his policies could drive a resurgence in inflation, hurting the rate-sensitive sector.
Investors have already dialed back expectations for rate cuts in 2025, and that has pushed Treasury yields to multi-month highs. Small-cap companies tend to carry more debt on their balance sheets, which means an increase in interest rates could drive up borrowing costs for them and make servicing their debt more difficult, analysts say.
Despite the index’s underperformance this year, valuations are high. The Russell 2000 is trading at around 28.3 times forward earnings, according to data compiled by LSEG, compared with S&P 500′s 22.7.