Market turmoil as small caps struggle amid AI surge

In a recent government meeting, officials reviewed the performance of various stock indexes and economic indicators, revealing a challenging quarter for most stocks, particularly in small and mid-cap categories. The Russell 2000 growth index saw a decline of nearly 3%, while the value index dropped by 3.4%. In contrast, large-cap growth stocks, particularly those linked to artificial intelligence, drove the Russell 1000 growth index up by 8.3%, positively impacting the S&P 500 due to its cap-weighted nature.

International markets also faced difficulties, with a negative quarterly performance attributed to a stronger dollar, despite a positive annual return of 5%. Emerging markets showed resilience, performing well during the quarter, although exposure from local managers was limited.

The meeting also addressed the bond market, noting a slight decline in capital value due to rising interest rates, which were offset by higher coupon payments. The yield curve has shifted significantly over the past few years, reflecting the Federal Reserve's actions in response to inflation. Recent data indicated a decrease in inflation rates, with the core Consumer Price Index (CPI) showing a modest increase of 1.1% month-over-month.

Economic indicators suggest a slowdown, with home sales declining and manufacturing sentiment remaining below 50, indicating contraction. However, the service sector has shown signs of expansion, contributing positively to the economy. The unemployment rate has ticked up to 4.3%, prompting market volatility.

Despite these challenges, U.S. corporations are projected to see earnings growth of approximately 13%, with emerging markets expected to outperform at 18%. This mixed economic landscape highlights the complexities facing investors and policymakers as they navigate current market conditions.