Gap between Russell 2000 and Nasdaq Composite nears widest since 2001

In July, the Russell 2000 small-cap index has outpaced the tech-heavy Nasdaq Composite by 12.7 percentage points, according to Dow Jones Market Data cited by the Wall Street Journal. If this trend holds until the end of the trading day today, the last day of the month, it will mark the biggest monthly performance gap between the two indexes since February 2001.

Details

On Tuesday, July 30, the Russell 2000 rose 0.35%, while the Nasdaq Composite dropped almost 1.30%, which highlights the ongoing rotation in the stock market, reports the Wall Street Journal. The outperformance by the Russell 2000 is set to become the biggest since February 2001, according to the newspaper.

The shift out of Big Tech stocks and into small caps has been a trend for several weeks now. The latest, disappointing earnings from Tesla and Alphabet have heightened concerns that large companies might be overvalued. This, Reuters explains, has driven traders toward small-cap stocks and other sectors.

Small caps could rise 15% in August, Tom Lee, a managing partner and the head of research at Fundstrat Global Advisors, recently suggested in an interview with CNBC.

Analyst thoughts on the rotation

• JPMorgan analysts see the returns of small caps in the U.S. as sustainable over a 10-15-year time horizon. Additionally, this represents an opportunity for portfolio diversification, with JPMorgan recommending allocating 5-10% of a portfolio to small-cap stocks.

• David Kostin, a partner and the chief U.S. equity strategist at Goldman Sachs, highlighted last week that U.S. small-cap stocks were showing the best relative returns over a rolling five-day period in at least 40 years. Key factors supporting them include slowing inflation, an imminent Fed rate cut, resilient economic growth, increasing chances of a Trump presidency, and a narrowing earnings growth gap between large- and small-cap stocks.

• Jim Cramer, host of CNBC’s Mad Money with Jim Cramer, believes that the recent Wall Street moves are not attributable solely to rising interest in small-cap stocks. Everything is rallying aside from the tech titans, he notes.