The Russell 2000 small-cap index is up 7.4% in July alone, outpacing the S&P 500. Investors are bullish on the smaller end of the market because interest rates appear likely to fall over the next few months.
Stanley Druckenmiller bought shares of Nvidia before its epic run, but has since reduced his stake and invested in small-cap stocks. There's data to show that small-cap stocks are generally undervalued, but they've quickly shot up in the last month.
ETFs across various categories pulled in $35.8 billion in capital last week, pushing the year-to-date inflows to $406.3 billion.
Small-cap stocks, as indicated by the Russell 2000 Index, have lagged their bigger peers.
The iShares Russell 2000 ETF NYSE: IWM experienced a significant breakout above multi-year resistance last week, sparked by the release of the CPI inflation data on Thursday. This move was one of the most eye-opening events of the week, drawing significant attention to small-cap stocks.
The big keep getting bigger, until they don't. Since nothing grows to the moon, in the markets there always comes a time when momentum reverses sharply, and the unloved become loved and the loved become hated.
Lower inflation means lower interest rates - a bullish sign for small-cap stocks into year-end.
U.S. money supply started shrinking in late 2022 as the Federal Reserve raised interest rates. A tight money supply makes it hard for smaller businesses to compete.
iShares Russell 2000 ETF provides exposure to 2,000 U.S. small-cap companies, replicating the Russell 2000 Index. Vanguard Small-Cap ETF outperformed IWM and Schwab U.S. Small-Cap ETF since 2015; however, will it continue? Small-caps are a good allocation with potential for growth, especially with possible rate cuts in the future.
Small-cap stocks have underperformed compared to the S&P 500 due to persistent inflation and fading expectations for rate cuts. iShares Russell 2000 ETF tracks the Russell 2000 Index and offers exposure to U.S. small-cap stocks. The outlook for small-cap stocks has deteriorated, and the risk/reward setup does not currently warrant a Hold rating.
At this point, we are all aware that the Russell 2000 has severely underperformed the broad market indexes over the last year.
The technology sector's outperformance likely to wane as the market enters a mid-cycle slowdown. Nvidia Corporation's valuation requires perfection, and its rate of growth is expected to slow dramatically. Small-cap stocks, particularly the Russell 2000 Index, present an attractive value proposition and may outperform Nvidia.