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S&P's Stovall: Aggressive Fed may boost small caps

U.S. Federal Reserve Chair Janet Yellen
Kevin Lamarque | Reuters

The Federal Reserve's new, more hawkish nature, voiced last week by Janet Yellen and other members at the central bank's Jackson Hole summit, could spark a rally in small-cap stocks to the detriment of their larger peers, according to Sam Stovall, U.S. equity strategist at S&P Global Market Intelligence.

Wrote Stovall in a note sent to clients Monday:

"The Fed took investors by surprise last week with its more aggressive tone, as it signaled an intent to raise short-term rates not only at the December FOMC meeting, but also possibly as soon as September. Higher yielding large-cap stocks and sectors tumbled on the news. Yet small-cap issues held up well, even rising on the week and setting an additional all-time high on Tuesday. Maybe the 'great rotation' pertains less to stocks versus bonds than it does between large- and small-cap equities."

Stovall cited two reasons why the Fed's new mindset would boost small caps and hurt big stocks: Higher rates will offer new competition from bonds for the shares of dividend payers in the large-cap world and a rising dollar will hurt multinationals.

The strategist also gave the firm's favorite small-cap stock ideas.