Renewed Investor Confidence Rises as...

Renewed Investor Confidence Rises as Recession Fears Abate

Small Cap Quality Value Review of the Second Quarter of 2023 | KayneCast 223

July 27, 2023

In this episode of KanyeCast, Steve Rigali, Executive Managing Director with Kanye Anderson Rudnick, talks with Julie Kutasov, Portfolio Manager of the KAR Small Cap Quality Value Strategy. Kutasov provides insight into the Q2 2023 market, focusing on equities and the state of the banking industry.

Q2 2023 Sees U.S. Equities Advance

Kutasov notes that U.S. equities advanced in Q2, with the S&P 500 Index rising 8.7 percent and the NASDAQ Composite Index climbing 13.1 percent. At the same time, the Russell 2000 Value Index – the benchmark for KAR’s Small Cap Strategy – “was driven by companies with lower earnings’ quality, weaker balance sheets, and higher share price volatility.”

Overall, “Large Cap stocks outperformed Small Caps, and tech-heavy growth indices outperformed bank-heavy value counterparts.” Market gains were modest and led by tech companies associated with the artificial intelligence boom.

An economic recession failed to materialize in Q2 2023, thanks in part to a quick response from bankers and regulators after Silicon Valley Bank’s collapse. The labor market remained solid. Inflation, a market concern throughout Q1, was elevated for the second quarter but lower than early in 2023. These positive factors encouraged investors to buy riskier assets.

The Small Cap Value Outlook for Q3 2023

Market pressures for Q2 2023 were much the same as those experienced over the last twelve months. Geopolitical uncertainty centered around the Russia/Ukraine war and strained U.S./China relationships continue to impact the market.

While lower than Q1 2023, inflation remains elevated, impacting consumer spending and leaving businesses “struggling to offset input costs’ increases with higher prices.” In addition, the recent banking crisis negatively impacted bank lending, increasing the risk of a severe downturn.

Economic data offers some concerning signs, with over 300 U.S. companies filing for bankruptcy between January and the end of May. Inflation, however, is trending lower, although the risk of further interest rate increases by the Feds remains. The labor market is tight but moving in the right direction.

Kutasov ends her outlook by noting that slowing economic growth typically results in a flight to quality investments, making KAR’s focus on the highest quality companies even more relevant. She also notes the rise of AI may open up new opportunities as the technology develops.

Listen to the podcast to learn more about Small Cap Value performance in Q2 2023 and read our Quarterly Market Review written by KAR CIO Doug Foreman for additional insights on Q2.



This information is being provided by Kayne Anderson Rudnick Investment Management, LLC (“KAR”) for illustrative purposes only. Information contained in this material is not intended by KAR to be interpreted as investment advice, a recommendation or solicitation to purchase securities, or a recommendation of a particular course of action and has not been updated since the date of the material, and KAR does not undertake to update the information presented should it change. This information is based on KAR’s opinions at the time of the recording of this material and are subject to change based on market activity. There is no guarantee that any forecasts made will come to pass. KAR makes no warranty as to the accuracy or reliability of the information contained herein. Past performance is no guarantee of future results.

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