The small-cap Russell 2000 (^RUT) index rose more than 1.5% on Wednesday, easily outpacing the gains of the three major indexes and approaching a 52-week high of 2,300.
If the Russell closes at current levels, it will mark the highest close for the index since November 2021.
Small caps were one of the most talked about trades on Wall Street in 2024. Given the sector’s greater exposure to refinancing risks, strategists have argued that lower interest rates will benefit the group. This statement, combined with evidence that the US economy continues to pursue solid growth, has again provided arguments for an allocation to small caps, according to Wall Street strategists.
Mike Wilson, Morgan Stanley’s Chief Investment Officer, recently switched to a “neutral” allocation to small versus large caps, following the Federal Reserve’s half-percentage point interest rate cut in September.
“For us to be downright positive on small caps in general, leading macro indicators likely need to show that a clear acceleration in growth is on the way,” Wilson wrote in a note to clients on Tuesday. “For now, we are focusing on idiosyncratic opportunities within the small cap space.”
He added: “Valuation is relatively cheap for small caps, while earnings are expected to improve. To some extent, this has been the mantra of the small cap index for almost two years, but after consecutive years of earnings contraction, the consensus is more optimistic about earnings growth ahead.”