Closing Market Update: Small-Caps Rise Again

Small-cap stocks had another strong day Wednesday, but the overall U.S. equity market was subdued as investors awaited monthly inflation data and a Federal Reserve policy meeting next week.

The small-cap focused Russell 2000 (RUT) rose to a three-month high, but smaller companies are still underperforming the broader market, with very few Russell 2000 stocks making new 52-week highs, according to a report from the Schwab Center for Financial Research.

Small-cap and cyclical stocks "have started to behave well," but they are still in the "guilty until proven innocent" camp, the report says. Small-cap stocks are generally thought to be more exposed to slowing economic conditions than their larger peers and have had an especially hard ride since the banking crisis raised concerns about lending conditions back in March.

The market and economy continue to demonstrate "persistent bifurcation," the report says, with bulls and bears finding evidence to support their views.

"On the economic front, bulls can support their outlook by pointing to a resilient services sector, monthly payroll gains, and a low unemployment rate," the report says. "Bears can point to the decline in manufacturing sentiment, slowing pace of retail sales growth, and a significant decline in leading economic indicators."

Meanwhile, the equities market has diverged between a small handful of strong-performing mega-cap companies, which have delivered most of the gains we've seen recently in the big benchmark indexes, and the lagging majority. Such concentration suggests a weakness below the headline numbers that could become a problem down the line.

Here is where the major benchmarks ended:

• The S&P 500^® Index (SPX) was down 16.33 points (0.4%) at 4267.52; the Dow Jones Industrial Average (DJIA) was up 91.74 (0.3%) at 33,665.02; the Nasdaq Composite (COMPX) was down 171.52 (1.3%) at 13,104.90.
• The 10-year Treasury note yield (TNX) was up about 9 basis points at 3.791%.
• Cboe's Volatility Index (VIX) was down 0.04 at 13.92.

Smaller financial companies were in the spotlight again, with the KBW Regional Banking Index (KRX) continuing its rebound with a nearly 4% jump. Energy stocks were also strong as crude oil futures climbed more than 1%, and transportation companies also gained. Communication Services led decliners among S&P 500 sectors.

The following companies reported earnings over the past day or had news-driven stock price moves:

• Broadcom (AVGO) had its "buy" rating reiterated by a Bank of America analyst, who cited the company as a "best-in-class" buying opportunity as demand for artificial intelligence accelerates. Broadcom shares rose about 0.4%.
• Coinbase (COIN) rebounded a day after the Securities and Exchange Commission charged it with operating its platform as an unregistered national securities exchange, broker, and clearing agency. Its shares rose about 3%.
• Dave & Buster's (PLAY) reported stronger-than-expected first-quarter results Tuesday, though revenue fell short of forecasts. Its shares rose more than 18%.
• GameStop (GME) climbed ahead of the company's expected quarterly results, slated to be released after Wednesday's close. Analysts expect the company to report a loss of about 17 cents a share. Its shares were up nearly 6%.
• Netflix (NFLX) shares spiked earlier Wednesday after a JPMorgan analyst raised his price target, saying the company's password sharing crackdown can drive revenue growth. However, the stock ended little changed.

Investors are now settling in for the June 13–14 meeting of the Fed's policy-setting arm, which is generally expected to leave the benchmark lending rate unchanged.

"We expect the Fed to leave the door open to more rate hikes after the June meeting, but our base case is for a steady policy stance through the rest of the year," Schwab Chief Fixed Income Strategist Kathy Jones says. "Growth rates for both inflation and the economy are slowing, and the recent banking sector troubles combined with sluggish global growth continue to pose risks."

If any proof was needed that central banks can change course when least expected, the Bank of Canada provided the latest example when it raised its rate by another quarter point Wednesday after a long pause.

Canada's central bank "had been on pause since January and markets were expecting a steady rate policy throughout year-end," Kathy says. But concerns the Canadian economy was running too hot prompted the increase.

Canada's hike brought its base lending rate to 4.75%, slightly under the Fed's current funds rate target of 5 to 5.25% and stirred concern American officials might decide to follow suit.

Late Wednesday, investors put the probability of the Fed leaving rates unchanged in June at about 64%, down from 78% Tuesday, according to the CME FedWatch Tool. The current odds of the Fed following with a rate hike in July are roughly 50-50.