The small-cap Russell 2000 (^RUT) index is up more than 1.5% on Wednesday, far outpacing the gains of the three major indexes and closing in on its 52-week high of 2,300.
If the Russell closes at its current levels, it will mark the highest close for the index since November 2021.
Small caps have been one of the most highly debated trades on Wall Street in 2024. Given the sector’s higher exposure to refinancing risk, strategists have argued that lower rates will benefit the group. That thesis, combined with evidence that the US economy continues to track for solid growth, has once again built the case for an allocation to small caps, according to Wall Street strategists.
Morgan Stanley chief investment officer Mike Wilson recently moved to a “neutral” on allocation to small versus large caps following the Federal Reserve’s half-percentage-point interest rate cut in September.
“For us to get outright bullish on Small caps overall, leading macro indicators would likely need to show that a clear acceleration in growth is coming,” Wilson wrote in a note to clients on Tuesday. “For now, we’re focused on idiosyncratic opportunities within the small cap space.”
He added, “Valuation is relatively cheap for small caps, while earnings are set to improve. To some extent, this has been the Small cap index mantra for nearly two years, but after consecutive years of earnings contraction, the consensus is more optimistic on earnings expansion ahead.”
