July Market Rotation: Small Caps Outperforming Tech Stocks
July witnessed a notable market shift as investors turned their attention to small-cap stocks in anticipation of potential interest rate cuts from the Federal Reserve. This strategic pivot propelled the iShares Russell 2000 ETF to its strongest monthly performance against the Nasdaq 100, represented by the Invesco QQQ Trust, in nearly two decades, since April 2002.
Significant Performance Discrepancy
During the month, the Russell 2000 surged by an impressive 9.2%, while the Nasdaq 100 experienced a decline of 5%, resulting in a remarkable 14% outperformance of small caps over tech stocks by the end of July.
Historical Context and Relative Performance
Year-to-date figures indicate that small caps have nearly closed the gap with tech stocks after exhibiting flat performance. Over the past 12 years, the Russell 2000 has outperformed the Nasdaq 100 in only three calendar years: 2013, 2016, and 2022.
Prospects for Small Caps
The potential for further extension of this rotation is evident if the Federal Reserve proceeds with anticipated interest rate cuts. A positive scenario for small caps involves robust economic growth alleviating recession concerns, alongside easing inflationary pressures that could trigger rate cuts unrelated to a slowdown.
Investor Confidence and Market Analysis
Quincy Krosby, chief global strategist for LPL Financial, notes that the allure of interest rate cuts has spurred a surge in small-cap stocks due to their sensitivity to interest rate changes compared to the S&P 500 and mega-tech companies. This continued investment reflects investor confidence in a strong economic backdrop and the expectation of lower interest rates.
Implications of Presidential Elections
Bank of America analyst Stephen Suttmeier highlights a historical trend where the Russell 2000 achieved all-time highs in four out of the last five presidential elections. The current setup suggests that the 2024 election may coincide with new all-time highs, supported by a breakout from a significant base.
SmallCap Conference 2024
Chicago is set to host Benzinga’s highly anticipated SmallCap Conference 2024 on October 9-10. This event, expected to attract a live-stream audience of 10 million, offers investors a unique chance to engage with emerging small-cap companies, attend engaging presentations, participate in interactive Q&A sessions, and network extensively.
