Investor Eric Johnson says small-cap stocks may offer a rare entry point, even as questions emerge about the future of Federal Reserve leadership. The EMJ Capital president raised both themes during a recent appearance on Fox Business, tying market opportunity to policy uncertainty and valuation gaps. The discussion comes as traders weigh inflation progress, rate-cut timing, and a potential turn in market breadth.
EMJ Capital president and portfolio manager Eric Johnson discusses Jerome Powell’s tenure at the Fed coming to an end, generational mispricing opportunities in small-cap stocks and more on ‘Making Money.’
Fed Leadership And Policy Uncertainty
Jerome Powell began his second term as Fed chair in May 2022. That term runs through May 2026. While a change is not imminent, succession talk tends to grow as terms age. Markets often react more to policy signals than personnel headlines, but leadership questions can add volatility.
Under Powell, the central bank raised rates at a rapid pace in 2022 and 2023 to fight high inflation. Price pressures eased from their peak, yet inflation remained above the Fed’s 2% goal for much of 2024. Investors have debated how long rates will stay restrictive. That debate shapes the outlook for smaller, rate‑sensitive companies.
Analysts say the chair’s successor—whenever named—will likely maintain a focus on price stability and full employment. The path of inflation and growth will guide rate decisions more than personalities. Still, any shift at the top can influence market confidence and yield expectations at the margin.
Why Small Caps Are Back In Focus
Johnson highlighted what he views as a “generational” gap in small-cap valuations. Smaller companies often lag when borrowing costs are high and credit is tight. They also rebound faster when financial conditions ease. That cycle has drawn fresh attention after several years of mega-cap dominance.
Supporters of the small-cap case point to cheaper valuations relative to large caps. They note that a broader rally could follow once earnings stabilize and rates drift lower. Industrials, regional services, and select tech suppliers are often cited as potential beneficiaries.
Skeptics warn that balance sheet stress remains a risk. Many small firms face higher interest expenses and refinancing needs. Profit margins are uneven, and some sectors still face weak demand. If growth slows or inflation flares again, these companies could struggle to re-rate.
What The Numbers Suggest
Performance gaps between large and small companies have widened in recent years. The S&P 500, lifted by a handful of mega-cap names, has outpaced the Russell 2000 since 2021. The spread reflects stronger balance sheets and steadier profits at larger firms.
- Small-cap indexes have trailed large caps in most recent years, with occasional short rallies.
- Research desks have flagged one of the widest valuation discounts for small caps in decades.
- Earnings visibility for smaller firms is improving, but refinancing costs remain a concern.
Valuation metrics for small caps can be noisy because more companies report losses. Analysts often use forward earnings or enterprise-value measures to smooth the picture. Even on those gauges, smaller names trade at a marked discount to larger peers.
Potential Catalysts And Risks
Lower rates would ease debt burdens and could lift small-cap multiples. A pickup in credit issuance would also help companies refinance at acceptable terms. Broader market breadth, if it takes hold, would support Johnson’s thesis.
Risks include sticky inflation, a sharper economic slowdown, or stress in commercial real estate that tightens lending. Policy missteps or a sudden change in rate expectations could also hit fragile balance sheets. Investors may need to be selective, favoring firms with positive cash flow and manageable debt.
How Succession Talk Meets Strategy
Speculation about Fed leadership can influence timing trades but rarely changes long‑term strategy. For small-cap investors, the bigger driver is the rate path and earnings cycle. If inflation cools and growth steadies, small caps could narrow the gap with mega caps.
Johnson’s comments tap into a wider debate about the next market leaders. After years of concentration, many portfolio managers seek diversification. Small caps present a high‑risk, high‑variance path to that goal, provided policy winds shift in their favor.
Johnson’s call boils down to patience and timing. The Fed’s focus on inflation and employment will steer rates, regardless of who sits in the chair after 2026. If financing conditions improve and profits recover, small caps could regain ground. Investors should watch inflation data, credit spreads, and earnings revisions for early signals of a durable turn.
