Small-cap Russell 2000 set for best five-day rally in four years
Dow rallies ~1.5%, S&P 500 gains modestly, Nasdaq dips
Industrials lead S&P 500 sector gainers; Tech weakest group
Euro STOXX 600 index off ~0.3%
Dollar edges up; gold, bitcoin both up >1%; crude down >1%
U.S. 10-Year Treasury yield falls to ~4.19%
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SMALL-CAP RUSSELL 2000 SET FOR BEST FIVE-SESSION RALLY IN FOUR YEARS
The small cap Russell 2000 .RUT is getting its day in the sun after underperforming the benchmark large-cap S&P 500 .SPX for years as investors look beyond AI beneficiaries to small-cap stocks which have lagged.
The Russell 2000, which is trading at levels last seen in Jan. 2022, is rising for the fifth straight session on Tuesday, eyeing its best five-day gain in four years.
The more domestically-focused index has risen 10.4% so far this year, underperforming the large-cap S&P 500's .SPX 18.5% climb to record highs powered by the Nvidia-led NVDA.O AI boom.
The main reason for the persistent small cap underperformance is their weak pricing power, lower margins, and weaker balance sheets that have weighed on their earnings growth potential in an environment of high inflation and elevated rates, said Kelvin Wong, senior market analyst, OANDA.
However, the recent fall in U.S. Treasury yields after softer U.S. jobs data and easing inflation that boosted the odds of a September rate cut is "likely to lower the debt burden costs of Russell 2000 firms and improve their profitability trends," Wong said, supporting small cap stocks.
The rotation from large cap tech into small caps "doesn't appear to be a one off although it's far too early to suggest that we're experiencing a sustainable trend," said from David Morrison, senior market analyst at financial services provider Trade Nation.
"Nevertheless, there's certainly a bullish interpretation to the rotation, as any profit-taking in 'overvalued' tech gets funneled into more neglected areas of the U.S. stock market."
Not everyone, however, is optimistic that small cap stocks can take the lead from megacap tech stocks and extend the U.S. stock rally.
"If you think that small caps could absorb declines in large caps, then you would probably think that you could drain one of the Great Lakes into your backyard swimming pool," said Sam Stovall, chief investment strategist of CFRA Research.
For context, the largest U.S. companies Apple AAPL.O, Nvidia NVDA.O and Microsoft MSFT.O each sport a market value of over $3 trillion, more than the entire market value of the Russell 2000 index at $2.60 trillion.
(Medha Singh and Ankika Biswas)
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