Daily Brief - Safe harbor during stock market storm

TLDR: Looking for a lifeline amid the stock market storm but still keen to stay in the game?

You might try looking at small caps. Out of America's top 3,000 public companies, the top 1,000 gobble up 95% of the market value. Meanwhile, the next 2,000—the Russell 2000 index—are worth less than Apple. But guess what? They’re making waves. Recently, the Russell 2000 surged 9%, hitting its highest mark since early 2022.

Now, the analysts are buzzing: Is this a one-off blip, the dawn of a “small-cap summer,” or even the start of a “great rotation” from big to small stocks? With the market having been led by a narrow band of tech giants, a broader market rally would be a welcome shake-up. And the stronger GDP growth report yesterday —2.8% versus the expected 2%—is just the kind of backdrop that favors small caps.

Compared to the sky-high valuations of the mega companies, the mini-me’s are starting to look like a rare gem. Plus, with the Fed hinting at interest rate cuts, which typically favor small stocks, and the Russell 2000’s fortunes closely tied to the domestic economy, there’s more upside. About 40% of Russell 2000’s borrowing is at floating rates, so lower capital costs could make these companies more enticing acquisition targets. Private equity and big firms on the hunt for growth are already eyeing them.

The icing on the cake? An encouraging inflation report today, with the PCE index coming in at 2.5%. The small-cap party can get started.

Scenario Spotlight: What next? Just ask Terminal

Market Movers: But what specific stocks, Terminal?

The image above shows the historically top 10 performing small cap stocks on a 1-month horizon, following previous 10% jumps in the Russell index.