Small caps come back

There is one portion of the US stock universe that has welcome the interest rate cut more than the rest, and that has been the small cap companies. In the chart below you can see how the purple line (Russell 2000) representing the small caps has been catching up and closing the gap on a YTD basis with the large caps (Russell 1000) tracked by the green line. In fact, since the lows of liberation day, small caps have outperformed large caps by almost 500 bps. They are very sensible to interest rates and they seem to be discounting, as a cohort, that the Fed has in fact started an easing cycle. Or perhaps they’re just witnessing the transition to a less independent Fed that will lower rates to please the White House. Whatever that is, they’re gaining steam. They’re also a valuation play, since the Russell 1000 is trading around 33 P/E and the Russell 2000 is trading around 17 P/E. Tailwinds are coming for small caps.

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Chart source: Fund@mental