Following yesterday’s Federal Reserve rate cut, three out of four (75%) fund managers who specialize in managing funds that invest primarily in small-cap and micro-cap stocks, are predicting further rate cuts from the Federal Reserve this year, according to new global research from New Horizon Aircraft (NASDAQ: HOVR), the advanced aerospace engineering company and developer of eVTOL (electric Vertical Take-Off and Landing) aircraft (please see the attached press release).

The global study with small and micro-cap fund managers in the US, Canada, Europe, the Middle East and Asia who collectively have $82.4 billion assets under management, found three in five (59%) fund managers believe that the Federal Reserve will cut rates once more during 2024 and a further 16% believe that there could be more than one cut made by the end of the year.

Looking ahead, fund managers expect Federal Reserve interest rate cuts to continue, with one in five (19%) respondents in the study saying they expect three cuts during 2025, 59% expect two cuts and 20% anticipate there will be just a single cut made. This expectation for multiple interest rate cuts over the remainder of 2024 and 2025 is matched by the finding that 82% of fund managers interviewed believe that US interest rates will have fallen from their current level of 4.9% to 4.3% or less by the end of 2025. Some 14% believe that the rate could even fall below 4.1%.

Given the fact that 40% of the debt on Russell 2000 companies is short-term or floating rate, compared with around 9% for S&P companies, the anticipated fall in interest rates is expected by 89% of fund managers to have a more positive impact on micro and small-cap valuations than on large caps. Seven per cent of fund managers were unsure, and only 4% disagreed.

Although US inflation had slowed to 2.5% in the year to August 2024, it still remains above the Federal Reserve’s 2% target, however nine in 10 (89%) of fund managers in the study believe that this target will be achieved within the next 12 months, by Q2 2025.

The research indicates that the expectation for rate cuts and easing of inflationary pressure spells good news for micro and small-cap company valuations, with 99% of fund managers interviewed in agreement that they expect the economy during 2024 and 2025 to provide a more favourable foundation for micro and small cap valuations. Against the current backdrop of global small caps trading at the largest discount to large caps in over 20 years, the same number (99%) of fund managers expect micro and small-caps to deliver strong returns over the next 12 months.