Citi warns of rising risk of Fed rate hikes: Small-cap stocks may become the next target of sell-offs

BlockBeats news, July 27th, Citi’s strategy team warned that as expectations for a Federal Reserve rate hike rise, small-cap stocks may become the “hardest hit area” in the market correction. Due to the hawkish policy style of the Fed’s new chairman, Kevin Walsh, the market is shifting from relying on forward guidance to focusing on economic data.

The market’s expectations for a Fed rate hike this week have risen to over 30%. Stewart Kaiser, Citi’s head of US equity trading strategy, stated that even if rates are maintained this week, there is still a 70% chance of a rate hike in September. Citi suggests investors hedge risks by buying put options on the Russell 2000 Index ETF (IWM).

Citi believes small-cap stocks are more sensitive to interest rates, economic growth, and credit conditions. With the Fed signaling a hawkish stance, the Russell 2000 Index may face more pressure than large-cap tech stocks.

Meanwhile, data from Goldman Sachs shows that hedge funds are increasing their positions in the healthcare sector, with related funds performing strongly in the recent period. From August 2025 to April 2026, specialty healthcare hedge funds had an average return of nearly 40%, significantly higher than general equity funds. AI-driven drug development, increased healthcare industry mergers and acquisitions, and improved FDA approval efficiency are considered important reasons for capital inflows.

This week, the market focus remains on the Fed meeting and earnings reports from major tech companies. Citi points out that the market currently demands extremely high performance, and even if companies report better than expected profits, individual stocks may still decline due to “profit realization.”