One of Wall Street’s most anticipated predictions for the start of 2024 is finally driving the stock market higher.
After significantly underperforming the broader market in the first half of the year, small-cap stocks surged last week. The historic rally came after inflation came in higher than expected in June, raising market optimism about a Federal Reserve interest rate cut.
Over the past month, the Russell 2000 (^RUT) index of small-cap stocks has risen about 8%, well outpacing the less-than-1% gain in the S&P 500 over the same period. But there were signs that this movement may be stalling on Thursday, when the Russell 2000 index fell more than 2%, extending losses from Wednesday’s trading session.
And now the pressing question among Wall Street strategists is whether there’s any more room for stocks to rise.
“If rate cuts remain priced in and the Trump 2.0 trade continues ahead of the U.S. presidential election, we think there is room for a continued rotation into lower quality names,” Maxwell Grinacoff, U.S. equity derivatives strategist at UBS Investment Bank, wrote in a client note on Thursday.
Grinakoff added that the key to a continued rise is further containment of inflation and economic data showing the same or higher growth rates.
From the latest inflation release date on July 11th through July 16th, small cap stocks saw historic gains.
With investors pricing in a 100% chance of the Fed cutting interest rates in September, the Russell 2000 Index has risen more than 11% over the past five trading days, including a gain of more than 3% on Tuesday alone, its biggest five-day outperformance against the S&P 500 Index on record, according to Bespoke Investment Group.
DataTrek co-founder Nicholas Colas said the historic move signals “a dramatic shift in investor sentiment that is likely to continue.”
Traders work on the floor of the New York Stock Exchange during afternoon trading in New York City on April 2, 2024. (Michael M. Santiago/Getty Images) (Michael M. Santiago via Getty Images)
Savita Subramanian, head of U.S. equity and quantitative strategy at Bank of America, told Yahoo Finance on Wednesday that the small-cap trend is “likely to continue.”
But for Subramanian, that doesn’t mean simply buying the Russell 2000 Index is the right trade.
Subramanian noted that roughly a third of the Russell 2000 index is unprofitable, and that the index as a whole faces much greater refinancing risk amid rising interest rates than indexes like the S&P 500.
“Their valuations are at a level that would justify a pretty fair comeback,” Subramanian said.
Still, Subramanian isn’t overly confident in the index overall, noting that areas with higher refinancing risk or credit sensitivity “may still be in the penalty box until the Fed actually starts cutting rates.”
The story continues
Josh Shaffer is a reporter for Yahoo Finance. Follow him on X Follow.
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