Good morning, investors. Increasingly, investors are telling me they believe that the easy money has been made in this market, and that winning bets will be harder to come by in the months ahead.
That forecast is already unfolding in the most rate-sensitive corner of the market.
Small but less and less mighty?
Small-cap stocks have almost nothing to show for the last four years before this one.
The Russell 2000 is up 28% since 2021 and nearly all of that arrived in the last 12 months. The rally priced in lower borrowing costs, but traders increasingly see the Fed hiking interest rates before 2027.
CME data shows roughly a two-in-three shot of a rate hike this month, and markets took Kevin Warsh’s Jackson Hole speech with a hawkish bias.
Smaller companies are more sensitive to benchmark interest rates than larger ones.
Bank of America estimates that every 25 basis point hike knocks off about 2% Russell 2000 operating earnings.
Recent selling pressure already fits that pattern. Since Warsh spoke last week, the 2-year Treasury yield has climbed to its highest level since 2023 while the Russell 2000 has fallen more than 3%, a steeper drop than the S&P 500’s 1.3%.
That suggests the stocks that have led the rally this year could lose ground in the coming months, as I explained in a segment on The Street on Wednesday.
Another telling sign of potential fragility is that unprofitable Russell 2000 names have outperformed the profitable ones in this rally.
To be sure, the bull case is still on the table, even if that table is getting smaller.
Small-caps continue to trade at a discount to large-caps, domestic-focused businesses are more insulated from geopolitical uncertainty, and a sustained broadening out in the market rewards them.
Even so, an index that is banking on cheap credit to refinance may not be the best bet against a backdrop of rate hikes.
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Elsewhere
🚗 Uber is cutting 3,300 jobs. That’s about 10% of its workforce, and the move is part of a broader restructuring effort. The stock ticked up on the news Wednesday. (TechCrunch)
📉 US private employers added 38,000 jobs in August. The ADP print was the weakest since January and undershot the 47,000 consensus, with manufacturing shedding 17,000 positions on its own. (CNBC)
🌍 A judge ruled Google doesn’t have to spin off its “network” ad business. It’s a massive win for the conglomerate, which was found guilty last year of violating US antitrust laws. (Axios)
🚢 More than 17 million barrels of oil transited the Strait of Hormuz on Monday. That’s according to US Energy Secretary Chris Wright, but other industry estimates are far lower than the official numbers. (CNBC)
Rapid-fire
Broadcom shared a weak revenue forecast while beating earnings estimates (CNBC)
Data center construction has boomed while all other private construction spending has collapsed (WSJ)
New York Fed’s Williams said yields are rising due to strong economic outlook (CNBC)
Goldman Sachs is forecasting lower S&P 500 returns over the next year (Yahoo Finance)
Sam Altman told the G20 audience that the use of AI is “non-negotiable” (CNBC)
How BlackRock’s investment chief sees the next decade of the AI trade (Full Signal)
Apple’s revenue rose 166% under Tim Cook (Opening Bell Daily)
On this day
🗓 September 3, 1929: The Dow Jones Industrial Average closed at 381.17, its all-time high before the massive crash that ended the decade. It would take more than 25 years to reclaim that level.
Last thing
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