The U.S. economy has stood resilient despite the price pressures stemming from the Iran war.
U.S. job growth accelerated sharply in August, suggesting an improvement in the labor market as employment in leisure and hospitality rebounded after two straight monthly declines.
"Consumers, labor markets and corporate balance sheets have generally held up better than feared. Many investors spent the past three years expecting recession. Instead, they got slower but positive growth," said analysts at Aberdeen.
Inflation pressures have been running high, but consumer spending remains robust, though customers are seeking lower-cost alternatives.
The Bureau of Economic Analysis last month revised up consumer spending estimates to 3.4% from the originally reported 3.2%, in an indication that the individual consumption that supports two-thirds of U.S. economic activity had held up through the first half of the year.
Smaller firms often rely on external borrowing to fund their operations, making them vulnerable to higher interest rates.
Despite that sensitivity, the Russell 2000 index of smaller U.S. companies has sharply outperformed the benchmark S&P 500 this year, helped by strong earnings and as investors sought exposure to parts of the market beyond high-growth technology stocks.
While the higher yields have weighed on the small-cap stocks recently, driving the index down more than 5% from its mid-August record high, many expect the momentum to continue.
"Almost all of the lead was built in the first half, when the domestic growth story was doing the heavy lifting: reshoring, an M&A pickup, deregulation and earnings that are far more levered to the U.S. economy than to the mega-cap AI trade," said Tracy Shuchart, senior economist at NinjaTrader.
"If the Fed holds, that is a tailwind for the Russell, because the group has the most to gain the moment the market stops pricing higher for longer."
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