While Big Tech stocks have led the market rally on the back of surging artificial intelligence (AI) adoption, recent data - including a tamer-than-expected consumer price index (CPI) report for June - sparked renewed buying interest in parts of the market that were previously underappreciated. Small-cap stocks, in particular, have captured newfound investor interest, as investors look to broaden out from the once-dominant Big Tech stocks.
Tom Lee, head of research at Fundstrat, is bullish on small caps, with the analyst forecasting a sustained rally totaling almost 50% in 2024. Among the various drivers for small-caps, Lee cites a high probability of a Fed rate cut this fall, improving sentiment toward regional banks, and narrowing risk premiums on small-cap debt, which indicates rising investor confidence. With all of these factors aligning, Lee believes that small-caps offer the "most compelling near-term investment case."
