While today’s widespread selling is knocking major equity benchmarks lower across the board, one of the major trends in July was a rotation out of mega-caps and into small-cap stocks. After a lengthy period of underperformance relative to the rest of the market, the recent rise in small caps can be linked to investors betting on upcoming interest rate cuts amid easing inflationary pressures.
Lower rates would be a boon for smaller companies, which typically carry more debt than their mega-cap counterparts. Technical analysts have also spotted bullish signals for small caps, as well. Bank of America's (BAC) Stephen Suttmeier recently highlighted that the Russell 2000 Index's (RUT) rally aligns with a wave of small-cap stocks hitting 52-week highs, marking what he calls a "big base breakout."
