US market indices are shown in real time, except for the S&P 500 which is refreshed every two minutes. Your CNN account Log in to your CNN account “I don’t think we’ve hit the dip on those small-cap stocks,” said Anna Rathbun, chief investment officer at CBIZ Investment Advisory Services. The Federal Reserve paused interest rates in June but signaled that it could raise rates by a quarter point twice more this year, which could tighten credit conditions and potentially lead to more bank turmoil. Small caps could also get hammered again if the economy does tip into a recession later this year, and it’s unclear just how long a downturn would last. The Russell 1000, a large-cap index, is up about 13.5% for the year compared to the small cap focused Russell 2000’s 5.8% gain. Still, large-cap stocks continue to largely outperform their small-cap counterparts by a wide margin. His firm is overweight in cyclical sectors such as industrials and materials. You should really start thinking about what’s on the other side,” said Francis Gannon, co-chief investment officer at Royce Investment Partners, which focuses on small caps. “Everybody seems to be so focused on the recession. The iShares Russell 2000 exchange-traded fund, which tracks the performance of small cap stocks, has outperformed the broader S&P 500 index for the two years following four out of six bear markets from 2007 to 2020, according to data from Penn Capital Management. “If we continue to see interest in the small caps, it would reflect investor belief that it will be a more muted recession,” said Krosby.Īdding to their bull case is small caps’ tendency to rally in periods following economic downturns. Because small caps tend to be more volatile, their rally suggests that investors’ risk appetites are growing and they’re looking past the banking turmoil earlier this year.
The small caps’ rally is also an auspicious sign for the broader economy, says Quincy Krosby, chief global strategist at LPL Financial. He has investments in healthcare and technology. “It feels better to me than it has been for a while,” said John Ragard, senior portfolio manager of small cap equity at Spouting Rock Asset Management. Apellis Pharmaceuticals shares are up 69.1% for the year, Rambus added 64.9%, Shockwave Medical 44.1% and Saia added 48.8%. Investors have taken notice, driving some small caps to outperform the broader market. That means that small caps are cheap historically and in comparison to their large cap counterparts. The S&P 500, which contains large caps, in contrast, trades at multiples of 19, above its 10-year average of 17.61. The S&P 600 currently trades at about 13.53 times its expected earnings, below its 10-year average of 15.89, according to FactSet.
Some investors say cheap valuations and hopes for a muted economic downturn means small caps look more attractive than they have in months. Now, the rally in small caps suggests that Wall Street is optimistic about the economy’s health. The recovery in small caps is a reversal from when they nosedived earlier this year, weighed down by the collapses of Silicon Valley Bank, Signature Bank and later First Republic Bank, which triggered a sell-off in financial stocks. That’s partly because they’ve helped broaden a narrow rally led largely by mega-cap tech stocks, which have soared to staggering heights due to an artificial intelligence race and flight to safety on Wall Street. Investors say that recent gains in small caps are helping prop up the burgeoning bull market, even as a potential economic downturn draws near. While those stocks have stabilized since the banking turmoil earlier this year, their continued steadiness is necessary for a sustained market rally, since healthy banks underline a healthy economy. They also have large exposure to financial stocks. Small cap stocks are domestic bellwethers, since smaller companies generate most of their revenue from US customers. The S&P 600 small-cap index has rebounded roughly 8% from its low in May, and is on pace to notch its first winning month since January. Beaten-down stocks of smaller companies are finally making a comeback, underscoring Wall Street’s newfound optimism.
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