Pro Analysis

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

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

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.