Small caps could prove a profitable corner of the market heading into year end. The Russell 2000 just hit a new all-time high on Wednesday, on pace for its fifth record this year. What’s more, according to Katie Stockton, founder at Fairlead Strategies, the index is poised to break out above final resistance around 2,466, after first clearing its 200-day moving average in September. Last month, it also knocked out its prior record high going all the way back to November 2021. Those are bullish signals for an asset class that has consistently underperformed, but is now attracting improved sentiment from various Wall Street trading desks that it can do better in the future — especially as investors grow wary of a pullback in large cap stocks. “I don’t see the relative shift as wholly related to the weakened momentum of late, but rather a loss of confidence perhaps in the leadership stronghold of large-cap technology stocks, including some of the megacaps,” Stockton wrote to CNBC. The technical analyst, who’s near-term bearish on the S & P 500 , said the broad market index could be due for a “significant pullback” in the coming weeks. “This should be important to investors who are heavily exposed to large-cap technology, and might warrant a shift in portfolio allocations to manage risk and leverage a possible breakout in the Russell 2000 Index, which would occur on two consecutive weekly closes above ~2460 (Nov 2021 high) in a bullish long-term development,” she added. In late day trading Wednesday, the Russell 2000 was ahead 0.8%, twice the gain in the S & P 500. .RUT YTD mountain Russell 2000 in 2025 There’s a reason for the recent outperformance in small caps. The start of an easing cycle by the Federal Reserve in what has so far proven a resilient U.S. economy is stimulative for smaller companies, which are closely tied to business cycles and more sensitive to interest rates. On Tuesday, Fed Chair Jerome Powell’s comments suggesting the central bank’s tightening program of selling central bank assets could end soon only added to enthusiasm for small caps. To be sure, worries remain. Earlier this month, Trivector Research founder Adam Parker said small caps are a “structurally inferior” asset class, noting the companies tend to tilt toward value and are less profitable. Frothy pockets There are pockets of froth in the small caps as well, given that crypto-connected names, small-scale nuclear companies, clean energy and quantum computing stocks are among the leadership in the Russell 2000. Yet, Steven DeSanctis, U.S. small and mid cap strategist at Jefferies, looks for sustained outperformance from small caps. Lower borrowing costs, a pickup in mergers and acquisitions that benefits small cap financials and improving earnings growth can help boost the asset class’s short-term outlook. Or, at the very least, they can beat large caps through year end. DeSanctis has a year-end Russell 2000 target of 2,665, implying roughly 7% upside from Tuesday’s close. Jefferies’ year-end target for the S & P 500 is 6,600, below where the broader index is currently trading. “We don’t see a lot of upside in large cap,” DeSanctis said. “We see more upside down market cap” as attractive.
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