Small-Caps Break Out as Fundamentals Improve
The aftershocks of Fed Chair Jerome Powell’s hint at a September rate cut were still felt after Jackson Hole, with U.S. small-caps among the biggest winners. The Russell 2000 surged nearly 4% on Friday, finally breaking free from a long stretch of stagnation versus the S&P 500.
RBC Capital Markets strategist Lori Calvasina said the move was important not just for its size but for signaling a potential shift in market leadership away from the Magnificent Seven. While she warned the rally could fade as a short-covering bounce, investor positioning suggests it may have more room to run.
Valuations will be key. The Russell 2000 was trading at 16.3 times earnings before Powell’s speech, with levels at 17.5, 18, and 20 marking potential ceilings if momentum continues.
Keith Lerner of Truist Wealth upgraded small-caps to “neutral,” noting that, unlike in past rallies, price action now comes with improving earnings trends. He also highlighted new tax provisions that support leveraged and capital-intensive companies.
Still, lasting gains depend on economic strength. Nancy Lazar of Piper Sandler argues the U.S. is only beginning to feel the effects of last year’s rate cuts, and combined with a supportive policy mix of tax relief and deregulation, growth could reaccelerate to as much as 3% by 2026.
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