JEF‘s SMID-Cap Strategy—Thoughts & Observations: USA | Equity Strategy

Research evidence excerpt

JEF‘s SMID-Cap Strategy—Thoughts & Observations: USA | Equity Strategy

cent names are very expensive

inflation report calms the fears that a rate hike by the Fed was imminent, the market still thinks we Absolute (LHS) Relative (RHS)

Price to Sales for Beta 3.3could see a boost by year-end. Leading into a hike has been good for Small, especially if the economy 6.35.3

is accelerating. This goes with the higher for longer helping Small theme, as long as borrowing costs 4.3 2.82.3

do not rise significantly. 3.32.3 1.81.3

1.3 0.8

M&A activity has been running strong again, and it has been fairly broad across the sectors 0.3 0.3

including Fin'ls. An acceleration in M&A tends to be helpful for Small-Cap performance. .

Source: FactSet; FTSE Russell; Jefferies

With rebalancing in the rearview mirror, until December, we saw the P/E of the new Russell 2000

fall four multiple points, and our relative model now stands in the 21st percentile versus 33rd. We

also saw Value get cheaper than Growth, which tends to happen around rebalancing.

As for earnings, the '26 growth rate has headed higher for both Small & Mid, but has really jumped

for Large. We still see Small narrowing the gap in earnings vs. Large over the course of the year,

however it will be a close call as to who wins in Q4.

Focusing on two themes—Breaking Momentum and Fading Highest Beta: As we highlighted last

month, these two factors have been key drivers of performance for Small Caps of late and were

"Running hotter than a boiling kettle". These factors have taken a much-needed pause in July with

more to go. Some points:

Mo breaks as earnings growth broadens out, which we are seeing; Momentum is weak when LEIs

turn up, which we are seeing; Momentum trails in front of rate hikes based on median returns. Steven G.