The rally in Russell 2000 isn't justified or sustainable, says Jefferies analyst
By Anora M. Gaudiano, MarketWatch
The Russell 2000 has surged 7% over the past 30-day period, outstripping the S&P 500, Dow and the Nasdaq
A benchmark for small companies has so far stolen the show over the past 30 days, surging 7% and hitting all-time highs, but the rally isn't justified by fundamentals, and likely not sustainable, according to Steven DeSanctis, equity strategist at Jefferies.
Much of this surge in the Russell 2000 index has been attributed to optimism surrounding President Donald Trump's tax-reform proposal that would benefit small, domestic companies, but earnings growth--typically the main driver of prices--is simply not there to sustain presently lofty valuations, according to DeSanctis.
At the beginning of the year, earnings-growth estimates for 2017 was 14%, but, as has tended to be the case with estimates, they have been reduced to 5%. Meanwhile, third-quarter earnings growth is expected to come in at negative 2%, compared with 8% forecast in June, according to DeSanctis.
"The interesting thing is that sales growth has moved higher, most likely due to currency adjustments," DeSanctis said.
Indeed, the ICE U.S. Dollar index, which measures the buck against six major rivals is at 93.572, down about 8.5% so far this year, according to FactSet.
Read: Could Trump's tax push give languishing small-cap stocks a lifeline? (http://www.marketwatch.com/story/could-trumps-tax-push-give-languishing-small-cap-stocks-a-lifeline-2017-09-01)