Small-cap stocks are currently experiencing a significant surge as they have taken the lead from megacap technology shares to drive the bull market, buoyed by hopes that interest rate cuts will expand the economic recovery to their advantage.
The Russell 2000 index, the benchmark for small-cap stocks, soared 3.5% on Tuesday, reaching its highest level since January 2022. This marked the fifth instance since 1979 that the benchmark has achieved a five-day streak of gains exceeding 1%, according to Bespoke Investment Group.
Over the past month, the small-cap benchmark has increased by 12.8%, tripling the gains of the S&P 500. Tom Lee of Fundstrat, who has accurately predicted the stock market trends over the past few years, believes that the rally in small caps could continue for more than two months, resulting in substantial gains for this group.
“We think this move could be something like 10 weeks and as much as 40%. I think it is just starting,” Lee, head of research at Fundstrat, said Monday on CNBC’s “Closing Bell: Overtime.”
Market Rotation Investors are shifting their focus to previously overlooked areas of the market as cooling inflation data last week spurred bets that the Federal Reserve might cut interest rates soon, avoiding a recession. Small caps, typically more sensitive to economic fluctuations and market sentiment, could see significant benefits from falling rates.
Additionally, this group is gaining traction as the “Trump trade” among investors, perceived as potential beneficiaries of a win by former President Donald Trump in November.
While Trump has not provided detailed policy proposals for a second term, hiking tariffs while lowering taxes and regulation could boost domestic stocks, including small caps, according to David Kostin, chief U.S. equity strategist at Goldman Sachs.
Trump’s betting market odds of winning the election have steadily climbed in recent weeks since the debate against President Joe Biden in June and his survival of an assassination attempt over the weekend.
Despite potential delays, we should eventually see this trend reflected in the Australian market.