Strumming for Success: The Small Cap Revival
Just like country music breakthrough stars Jelly Roll, Shaboozy and Zach Bryan, small caps are having a moment. Shares in small caps have seen the biggest gains over the past week or so, with an impressive surge of over 11% and five consecutive days of upward movement prior to the start of Wednesday’s trading session. The resurgence is akin to the current boom in country music—a genre often dismissed by critics but now enjoying its biggest surge in 30 years, with a remarkable number of artists topping the charts, dominating streaming platforms and selling out large-capacity stadiums.
As of June 30, the Russell’s price-to-earnings ratio, excluding companies with negative earnings, stood at 16.9 – its lowest valuation since the Great Recession in 2008. Although the Russell still trails its late-2021 highs, it is rapidly closing the gap. The primary catalyst behind this surge is the Federal Reserve. While the Fed’s policies haven’t changed dramatically, better-than-expected inflation numbers last week led to some dovish comments from Jerome Powell, sparking speculation about a potential interest rate cut as early as September. The CME Group’s FedWatch Tool now puts the odds of at least one rate cut by the September meeting at 98%, up from roughly 66% just a few weeks ago.
With potential rate cuts on the horizon, it seems the long-awaited small-cap rally has finally arrived. This shift could indicate broader market strength moving beyond the dominance of the Magnificent Seven and leading AI stocks, giving small caps a chance to shine. Small caps, under-levered and undervalued compared to overpriced tech stocks, are experiencing a rebirth like the newfound coolness of country music.
As the second heat wave of the summer abates, small caps are continuing to heat up, signaling a potential shift in market dynamics. Poised to lead the charge, small caps are proving that underdogs with their stories of financial struggles and closed-door demons can indeed steal the spotlight.
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