Jefferies said August brought mixed fortunes across global markets, with small-cap stocks staging a strong rebound while active managers continued to struggle to beat benchmarks.
Small caps outperformed large caps by more than five percentage points in August, breaking a long losing streak. Gains were supported by expectations of Federal Reserve rate cuts, lower borrowing costs and stronger-than-expected earnings.
Since their recent lows, small caps have rallied 35%, Jefferies said, outpacing large caps by more than four percentage points.
The “bad” side of the story, according to the bank, was the concentration of performance in riskier corners of the market. Companies with market values under $500 million rose 11% in August and more than 50% from the bottom, while non-profitable firms and the highest-beta names also led gains.
Jefferies noted this came despite $11.4 billion of outflows from small-cap exchange-traded funds since the low point. Large-cap earnings growth is still expected to outpace small-cap results in the third and fourth quarters, raising questions about the durability of the rally.
The “ugly,” Jefferies said, has been the weak showing by active fund managers. Only 34% outperformed in August and less than 30% are ahead for the year.
Small-cap core and growth managers are trailing benchmarks by more than five percentage points, making this one of their toughest stretches since the post-2020 election period.
By sector, materials led in August with a 24% gain year-to-date, while cyclicals have been the clear winners since the market bottom. Technology and health care also stood out, with tech up 64% from the low and health care contributing to value and growth index returns.
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