Rising expectations of rate cuts and a Trump victory boost smaller US stocks

Move over, Nasdaq… The big three US stock indexes get all the attention, but a smaller index has snagged the spotlight. In the five trading sessions through Wednesday, the Russell 2000 rallied 11.5%, outperforming the S&P 500 by nearly 10% — the biggest lead on record. Unlike its mega-cap peers, the Russell tracks about 2K of America’s smallest publicly traded companies. After months of Big Tech rallies, investors sold off weighty names and cozied up to smaller firms.

• Mid-July rush: In the five days through July 12, investors poured billions into Russell 2000 exchange-traded funds.

• The Russell rally faltered late last week, but was still faring better than its larger peers. While the techy Nasdaq plunged 3.7% for the week, the Russell gained 1.7%.

Going small… A few things could’ve fueled the Russell rally. One, rate-cut expectations have spiked. A cool June inflation report showed that US consumer prices fell on a monthly basis for the first time in four years. Plus, Fed Chair Powell said he was feeling more confident that inflation’s easing, boosting investor hope he’ll finally bust out the scissors. As of Friday, traders seemed certain that the Fed would trim rates in September. Rising expectations of rate cuts and of a Donald Trump victory could be boosting small caps:

• Rate cuts could disproportionately help smaller firms, which tend to have higher shares of “floating-rate debt” (read: debt tied to the Fed’s rate). Rate cuts = lower interest payments on that debt.

• Tax cuts: Because small companies are more domestically oriented than global behemoths, they tend to face higher tax rates. So they have more to gain from Trump’s plan to extend tax cuts should he get reelected. Traders are betting on higher odds of a reelection after the former prez survived an attempt on his life.

• Bonus: US-oriented smaller cos are less exposed to fallout from global trade restrictions and higher tariffs (which Trump has supported).