Small-Cap Frenzy Fueled by Rate Cut Bets and Trump Trade Fever

• By Staff Editor
• Jul 16 2024

The small-cap frenzy is reaching a boiling point on Wall Street. The Russell 2000 index of smaller companies has rocketed 12% higher over the past month, trouncing the S&P 500's gains by a factor of three. On Tuesday, the index surged another 3.3% to hit its highest level since early 2022.

The scorching rally in pint-sized stocks is being propelled by two powerful forces: growing optimism over imminent Fed rate cuts to nurse the economic recovery, and the rising specter of a Donald Trump presidency.

On the policy front, cooling inflation data has markets betting the house on a September rate cut from the Fed. Traders are pricing in a 100% chance of a rate reduction next month after Fed Chair Powell signaled an openness to easier policy. The prospect of lower rates is fanning hopes for a soft economic landing, breathing new life into smaller, more domestically-focused companies.

Fueling the fire under small-caps is the increasing likelihood of Trump retaking the White House in 2024. The former president's poll numbers have been surging since his feisty debate performance against Joe Biden last month. His odds got an added boost after he survived an assassination attempt over the weekend, with his VP pick of J.D. Vance also seen as strengthening his electoral prospects.

While Trump hasn't outlined specific policy plans, a business-friendly Republican administration is expected to pursue corporate tax cuts, deregulation and protectionist trade policies - all potential tailwinds for the smaller, U.S-centric names found in the Russell 2000. As a result, the index is becoming a prime "Trump trade" target for investors positioning ahead of the election.

Investment research firm Fundstrat is pounding the table on the small-cap surge, with Tom Lee calling for dramatic outperformance in the weeks ahead. "We think this move could be something like 10 weeks and as much as 40%," Lee said on CNBC. "I think it is just starting."

The bullish small-cap call dovetails with the firm's expectation that stretched areas like big tech will underperform, as beaten-down market corners share in the limelight. Signs of that rotation are already emerging, with Amazon, Apple and other megacaps lagging on Tuesday as smaller stocks ripped higher.

Of course, any sustained small-cap run is contingent on the Fed delivering a "soft landing" and Trump surmounting the political headwinds facing his campaign. But for now, the potent cocktail of lower rates and Trump euphoria has small-cap stocks brimming with momentum unmatched across equity markets.

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