Stockton noted in her correspondence with CNBC, “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.” The technical analyst expressed a near-term bearish outlook on the S&P 500, suggesting that the broad market index might be due for a “significant pullback” in the coming weeks. This insight is crucial for investors heavily invested in large-cap technology, as it may necessitate a reevaluation of portfolio allocations to manage risk and capitalize on a potential breakout in the Russell 2000 Index. Such a breakout would occur with two consecutive weekly closes above approximately 2,460, the high from November 2021, marking a bullish long-term development.
In late trading on Wednesday, the Russell 2000 was up 0.8%, outperforming the S&P 500, which gained only half as much. The recent surge in small caps can be attributed to the anticipated easing cycle by the Federal Reserve, which is beneficial for smaller companies closely linked to business cycles and more sensitive to interest rates. On Tuesday, Fed Chair Jerome Powell’s remarks indicated that the central bank’s tightening program of selling assets could soon come to an end, further fueling enthusiasm for small caps.
However, concerns linger. Earlier this month, Adam Parker, founder of Trivector Research, described small caps as a “structurally inferior” asset class, pointing out that these companies often lean toward value and tend to be less profitable. There are also pockets of froth within the small-cap sector, particularly among crypto-related stocks, small-scale nuclear companies, clean energy firms, and quantum computing ventures, which are leading the Russell 2000.
Despite these concerns, Steven DeSanctis, U.S. small and mid-cap strategist at Jefferies, anticipates sustained outperformance from small caps. He believes that lower borrowing costs, an uptick in mergers and acquisitions benefiting small-cap financials, and improving earnings growth could enhance the asset class’s short-term outlook. At the very least, small caps may outperform large caps through the end of the year. DeSanctis has set a year-end target for the Russell 2000 at 2,665, suggesting approximately 7% upside from Tuesday’s close. In contrast, Jefferies’ year-end target for the S&P 500 is 6,600, which is below the current trading level of the broader index. “We don’t see a lot of upside in large cap,” DeSanctis stated. “We see more upside down market cap,” indicating a preference for smaller companies.
