Remember that friend who was always the underdog but suddenly becomes the star of the show? That’s basically small-cap stocks right now, and honestly, it’s about time they got their moment.
While everyone’s been obsessing over whether NVIDIA will hit another trillion-dollar milestone or if Apple can innovate beyond making their phones slightly thinner, small caps have quietly been crushing it. The Russell 2000 (think of it as the little sibling to the S&P 500) has jumped over 5% in the past month, leaving all the popular kids in the dust.
So what’s behind this David-beats-Goliath story? Two words: rate cuts. Jerome Powell basically gave the market a wink and a nod at Jackson Hole, and suddenly everyone remembered that small companies exist and might actually be worth paying attention to.
Here’s the thing about small caps that makes them the ultimate rate-cut beneficiaries: they’re perpetually broke but ambitious. Unlike Apple sitting on a cash pile that could fund a small country, these companies need to borrow money to grow. When interest rates are high, borrowing feels like getting a loan from a mob boss. When rates drop? Suddenly that expansion plan doesn’t seem so crazy.
John Murillo from B2BROKER (yes, that’s a real company name) puts it perfectly: small caps rely more on floating-rate debt, so when the Fed cuts rates, it’s like getting an instant discount on their biggest expense. It’s financial magic, except it’s actually just basic economics.
The numbers don’t lie either. Last year when the Fed started cutting rates, the Russell 2000 shot up 16% from September to December. Then reality hit, inflation came back like that ex who won’t take a hint, and small caps went back to being ignored. But now? They’re ready for their comeback tour.
Murillo thinks we could see another 5-7% jump through the end of Q3, and honestly, the math checks out. While large caps are trading at valuations that would make Warren Buffett’s famous indicator blush (it’s literally at an all-time high), small caps are sitting at 25-year lows relative to their bigger siblings.
It’s like finding designer jeans at a thrift store while everyone else is paying full price at the mall. The Shiller P/E ratio for large caps is at 39 – that’s “we’ve seen this movie before and it doesn’t end well” territory. Meanwhile, small caps are basically on clearance.
Of course, there’s always a catch. The economy is doing that thing where it looks strong on paper but feels wobbly in practice. GDP growth is solid, but jobs are getting scarce and inflation is being stubborn. It’s like your friend who posts gym selfies but still can’t run up the stairs without getting winded.
As Murillo wisely notes, small caps are “high-risk, high-reward” – basically the cryptocurrency of the stock world, but with actual businesses behind them. With rate cuts as a tailwind and valuations that actually make sense, small caps might just be the contrarian play that actually works.
Sometimes the best opportunities are hiding in plain sight, wearing a Russell 2000 name tag.