Russell 2000 gives up gains from Trump election

The small- and mid-cap-tracking Russell 2000 index has fallen nearly 5% since November 6, when Donald Trump won the U.S. presidential election. By comparison, the large-cap S&P 500 index gained 1% in the same period. While Trump’s policies are generally seen as helpful for small businesses, the prospect of higher interest rates for longer is unsettling investors, Reuters reports.

Details

Between November 6 and January 17, the Russell 2000 dropped nearly 5%, with the loss deepening to almost 7% versus the November 25 peak. The S&P SmallCap 600 experienced nearly identical declines.

In contrast, the S&P 500 gained 1% during the same November 6 to January 17 period.

Leading up to Trump’s inauguration, the Russell 2000 rose nearly 4.0% in the previous trading week, while the S&P SmallCap 600 gained almost 5.0% and the S&P 500 advanced 2.9%.

On the one hand, Trump’s policies are expected to stimulate domestic-led economic growth, which should boost small-cap stocks, according to Reuters. On the other hand, the prospect of higher interest rates for longer presents a significant headwind for smaller companies, which often rely on floating-rate debt.

Trump’s return to the White House creates opportunities for small businesses, “but that thesis for outperforming probably hinges more on a favorable interest rate environment,” said Yung-Yu Ma, chief investment officer at BMO Wealth Management, in comments to Reuters.

Context

In recent years, the Russell 2000 has significantly underperformed the S&P 500. Over the last five years, the broad-market index has gained nearly 81%, versus just over 33% for its small-cap peer. However, CNBC notes that the Russell 2000 saw some strong periods in 2024. The first, in July, occurred as investors rotated capital out of Big Tech stocks amid disappointing earnings. The second jump came in November, following Trump’s victory. Investors view Trump’s promised deregulation as particularly favorable for small businesses, CNBC previously reported.

Investor optimism has also been fueled by Fed rate cuts. Between early September and late December, the Fed cut rates three times by a total of one percentage point. However, in December, it signaled fewer rate cuts in 2025 than it had previously projected and the market had anticipated. This triggered a decline across U.S. stock indexes, with the Russell 2000 underperforming, plunging over 4% in a single day.

Analyst insights

Analysts remain upbeat about small caps. Freedom Broker predicted in late 2024 that the S&P SmallCap 600 would rise 23% in 2025 to reach 1,780 points, while the S&P 500 is expected to gain nearly 13% to 6,760 points. However, it also warned of risks from Fed policy. Expanding fiscal deficits could stoke inflation expectations and keep interest rates elevated, Freedom Broker noted in a report.

Financial services firm BTIG has highlighted seasonal trends, pointing out that the Russell 2000 typically declines in December before regaining momentum by mid-February.