Throughout 2024, we’ve seen a massive disconnect in the market…
While the S&P 500 has been hitting new highs… the small-cap Russell 2000 Index has been struggling in a major way.
But that’s about to change. Small caps are already closing the gap—and the sector’s upside is only just beginning…
Today, we’ll look at why small caps are readying for a long-term rally… and how to get exposure to this sector.
But first, let’s examine what’s been driving small caps’ significant underperformance compared to the rest of the market…
A historical first for small caps
The separation between small and large caps this year is unlike anything we’ve seen in decades…
In fact, at one point just a few weeks ago, it was the largest performance gap between the sectors in the past 30 years.
At the start of this month, the S&P 500 was up 15% year to date (YTD)… and the Nasdaq was up around 20%… while the Russell 2000 was only up 1%.
However, a look under the hood tells us these numbers aren’t exactly what they seem.
The market’s upside this year has been driven by only a handful of stocks… Even as the market hit new highs, 70–75% of stocks are actually down for the year.
Unsurprisingly, the few stocks pushing the market higher are the same ones that have been leading it for the past several years. We’re talking about the big tech names like Microsoft, Amazon, Apple, and NVIDIA.
But then, a couple of weeks ago, something incredible happened…
The latest Consumer Price Index (CPI) data was released on July 11… and small caps rallied while market-leading tech stocks fell. In the trading day following the CPI results, the Russell 2000 rallied by 3%… while the Nasdaq fell by 2%.
This is HUGE news… It was the first time in history that small caps have outperformed the Nasdaq in the wake of the CPI.
Why did this happen? Let’s dig a little deeper to find out…
A rotation out of large caps and into small caps
In the normal course of events, the latest CPI results would have been viewed as negative. They showed the economy is slowing… the jobs report has been revised downward for five straight months… and the housing market is relatively weak.
But in today’s economy, the results are actually a good thing; they show inflation is finally moderating…
And that means the Fed will cut rates sooner than later (the market is pricing in rate cuts in September).
Lower rates are historically good for small caps… as lower borrowing costs make it easier for small companies to invest in growth.
It’s important to note that this won’t be some short-lived trend… As the economy shifts away from inflation and high interest rates, we’ll start seeing a rotation out of large-cap stocks and into their smaller-cap counterparts.
Put simply, small caps are due for a major resurgence through 2025—at least.
If you don’t have much exposure to small caps, now is the time to get some.
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