Small caps triple S&P 500 gains over last month
The growth of the Russell 2000 index of small-cap stocks over the last one month has roughly tripled that of the leading U.S. index, the S&P 500. In the last four trading sessions in particular, the Russell 2000 has beaten the tech-heavy Nasdaq 100 by almost 11 percentage points, a feat not seen in 13 years. Investors have shown interest in small caps amid expectations of a Fed rate cut, the likelihood of which is perceived to have risen with inflation slowing.
Details
The Russell 2000 index comprises 2000 small-cap U.S. stocks with an average market capitalization of around $4.5 billion. On Wednesday, July 16, it hit its highest mark since early January 2022, peaking at 2,255.62 points during the trading session, 3.1% higher than the previous close. Meanwhile, a gain for the day meant that the index’s winning streak extended to five sessions.
Over the last month, the Russell 2000 is up 11%, almost triple the gain for the S&P 500 index with the largest-cap stocks, CNBC reports. In the last four trading sessions, the Russell 2000 has outperformed the Nasdaq 100, which features the biggest tech companies, by about 11 percentage points, an outperformance not seen since 2011, Bloomberg writes.
Why stocks are rising
Small-cap stocks have replaced mega caps as the biggest gainers, driven by optimism over an expected Fed rate cut. Investors believe that softer monetary policy will accelerate the economic recovery and benefit small companies in particular, CNBC noted. Fundstrat analyst Tom Lee predicts that the small-cap rally could last around 10 weeks, with growth potential of 40%. “I think it is just starting,” he was quoted by CNBC as saying.
Small-caps are typically more sensitive to economic fluctuations and market sentiment, meaning a rate cut could bring them “huge benefits,” CNBC pointed out. Additionally, CNBC says some investors believe that the segment is a potential beneficiary if Donald Trump wins the U.S. presidential election. Trump is expected to raise tariffs, cut taxes, and ease regulation, all of which would benefit U.S. stocks, including small caps, noted Goldman Sachs Head U.S. Equity Strategist David Kostin.
Currently, small-cap shares are relatively cheap, but they could jump if interest rates are cut while growth remains steady, Bloomberg quoted Solita Marcelli, chief investment officer for the Americas at UBS Global Wealth Management.
Inflation slowing down
The U.S. CPI, an inflation gauge, unexpectedly fell month-over-month in June, while the core CPI, which excludes volatile food and energy prices, saw the smallest year-over-over uptick in more than three years. Price growth still exceeds the Fed’s target of 2%, but the Fed does not intend to wait until inflation falls below this level: to do so could mean the Fed would be late to ease policy, explained Fed Chair Jerome Powell, so it just needs to be sure that the inflation slowdown is sustainable.
