A softer-than-expected U.S. jobs report and declining bond yields are creating conditions for a shift from megacap growth stocks to smaller-cap equities, according to Raymond James.
The firm pointed out that “10-year yields [were] down a whopping 15 bp on a very weak jobs print in August and a revision to June jobs that took it negative for the first time since 2020.”
Raymond James also noted that monthly payroll growth has slowed from roughly 150,000 in 2024 to “0–50K/month” during the summer. Against this backdrop, the firm said it “likely guarantees 25 bp on September 17 by the Fed, and maybe 50 bp.”
In this environment, sectors sensitive to interest rates are seeing stronger performance. “The rotation away from AI and into small caps (rate sensitive), and broader equity market participation [continued] last week,” the analysts wrote.
The rationale is simple: “~50% of the difference in earnings trend between large caps and mid/small-caps since 2022 has been related to small/mid-caps immediately feeling the impact of higher rates.” Raymond James added, “As rates come down, this reverses partially, making the strength in small/mid-caps relative to large caps as rates move lower completely logical.”
However, the firm cautioned that consensus in the Treasury market has often been off. “Since 2022, the 10-year Treasury yield has increased above 4.5% four times,” they said. “Here we are approaching 4%. It’s getting pretty consensus.”
Raymond James believes yields could return to 4.5% if economic growth strengthens into 2026. But for now, the combination of falling yields and a soft labor market is supporting small-cap performance. “No real pullback so far, and all remain above 50/200 DMA,” they observed, emphasizing the resilience of the ongoing rotation.
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