This story was originally published on Multifamily Dive. To receive daily news and insights, subscribe to our free daily Multifamily Dive newsletter. The Federal Open Market Committee maintained the target range for the federal funds rate at 3.5% to 3.75% at the end of its January meeting today, after it made multiple cuts last year. "The U.S. economy expanded at a solid pace last year and is coming into 2026 on a firm footing," Federal Reserve Chair Jerome Powell said in a news conference today. "While j ...

Core Insights - Small cap stocks, defined as companies with market values between approximately $300 million and $2 billion, are known for their potential to deliver significant gains but can also be volatile during uncertain times [1][2] Economic Conditions - Small caps tend to perform well during economic expansions, as they are more focused on domestic markets, making their success closely tied to local economic health [2] - The post-pandemic recovery in 2020 and 2021 saw a surge in U.S. small caps, which outperformed larger companies due to rebounding domestic demand [2] Labor Market Influence - A strong labor market positively impacts small cap performance, as lower unemployment rates lead to increased consumer spending, benefiting sectors like retail and hospitality where small caps are prevalent [3] Interest Rates - Small caps are more sensitive to interest rates, as they often rely on borrowing for growth. Low rates facilitate investment and hiring, while rising rates can hinder growth [4] - Predictability in interest rates from central banks boosts investor confidence, further benefiting small caps [4] Public Policy Impact - Government interventions such as tax incentives, deregulation, and fiscal stimulus can provide significant support to small businesses, enhancing their recovery and growth prospects [5] Valuation Dynamics - After periods of underperformance, small caps may appear undervalued compared to large caps, attracting value investors when fundamentals improve [6] Multi-Factor Catalysts - A small cap catch-up is typically driven by a combination of factors including economic growth, favorable monetary policy, strong labor markets, attractive valuations, and changing investor risk perceptions [7]

Market Outlook - Current market sentiment reflects a "Goldilocks scenario" where investors expect no compression in corporate margins, contained inflation, and a softening labor market allowing for rate cuts without recession [1] - The belief that earnings growth will remain strong as the Fed cuts rates is viewed as overly optimistic, with historical evidence suggesting significant risks associated with such a scenario [1][2] Economic Indicators - Historical patterns indicate that the Fed typically cuts rates during profit slowdowns, often leading to initial market declines before recovery [2] - Analysts tend to overestimate earnings during slowdowns, which is expected to be the case again, indicating stress in the market rather than a bull market [3] Investment Strategy - In light of the low probability of a favorable economic outcome, the recommendation is to focus on high-quality, dividend-paying equities, enhance regional diversification, and avoid corporate credit exposure [4]

Group 1: Investment Overview - Berkshire Hathaway recently invested $1.8 billion in Nucor, a leading steelmaker, along with two major homebuilders, D.R. Horton and Lennar, indicating a bullish outlook on economic growth and demand in cyclical sectors [4] - Nucor has a strong track record of increasing dividends for 52 consecutive years, making it a notable choice for income-seeking investors [2][9] Group 2: Competitive Advantages - Nucor utilizes a pioneering strategy of electric arc furnaces, known as mini-mills, which provide benefits such as lower carbon emissions, increased production flexibility, and reduced costs through the use of recycled scrap metal [5] - The company's shares are currently trading at about 13 times forward earnings, significantly cheaper than the S&P 500's average of around 22 times, suggesting a favorable valuation for potential earnings growth [6] Group 3: Growth Catalysts - Nucor has several capital projects nearing completion, including a rebar micro mill in North Carolina, a melt shop in Arizona, and a coating complex in Indiana, which are expected to drive future growth [7] - The demand for steel is anticipated to increase due to new semiconductor fabrication facilities, utility industry expansion, and data center development projects [7] Group 4: Financial Strength and Dividend - Nucor's dividend yield is approximately 1.5%, higher than the S&P 500's average of 1.2%, supported by robust cash flows and a strong balance sheet [10] - In the first half of the year, Nucor paid $258 million in dividends, which is less than a quarter of its $1.1 billion in operating cash flow, indicating strong financial health [10] - The company has returned a minimum of 40% of its annual net earnings to shareholders through dividends and share repurchases, having retired 27% of its outstanding shares since 2017 [11]