Small caps are currently the hottest trade in the stock market, rising another 3% on Tuesday

Small-cap stocks are currently in turmoil as they took over from mega-cap tech stocks last week to lead the bull market on the hope that rate cuts will broaden the economic recovery in their favor.

The Russell 2000 Indexthe benchmark for the group, rose 3.5% on Tuesday, hitting the highest level since January 2022. It was the fifth time since 1979 that the benchmark has posted a five-day streak of gains above 1%, according to Bespoke Investment Group. .

The small-cap benchmark is up 12.8% over the past month, tripling the S&P 500’s gains.

Fundstrat’s Tom Lee, who has rightly covered the stock market in recent years, said the rally in small caps could last more than two months, delivering dramatic gains for this cohort.

“We think this move could take about 10 weeks and as much as 40%. I think it’s just beginning,” Lee, head of research at Fundstrat, said Monday on CNBC’s “Closing Bell: Overtime.”

Investors are flocking to previously unloved corners of the market as last week’s cooling inflation data fueled expectations that the Federal Reserve could quickly cut rates and avoid a recession. Small caps tend to be more sensitive to fluctuations in the economy and market sentiment and can benefit disproportionately from falling interest rates.

Moreover, the group is gaining traction as the “Trump trade” among investors, seen as a potential beneficiary of a victory by former President Donald Trump in November.

While Trump has no detailed policy proposals for a second term, raising rates and cutting taxes and regulations could boost domestic stocks, including small caps, said David Kostin, chief U.S. equity strategist at Goldman Sachs.

Trump’s betting odds of winning the election have risen steadily in recent weeks since the debate against President Joe Biden in June and his survival of an assassination attempt over the weekend.