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SMALL CAPS HAVE A SPRING IN THEIR STEP, WALL STREET TAKES NOTICE

The Russell 2000 index .RUT surged nearly 4% on Friday after Fed Chair Powell's speech opened the door to a possible September rate cut. With this, small caps are garnering their fair share of attention on Wall Street.

In a note out late Friday, Truist upgraded U.S. small caps from "less attractive" to "neutral."

"We are upgrading small caps to neutral as the weight of the evidence has shifted. Valuations remain attractive, earnings trends are improving, and technical signals are turning more constructive," writes a Truist Advisory Services team, including chief market strategist, Keith Lerner.

That said, Lerner also says that while short-term momentum has improved, he does not see a sustained reversal in relative earnings or price trends versus large caps from a longer-term perspective.

On Monday, RBC's head of U.S. equity strategy research, Lori Calvasina, says that while Friday’s small-cap strength might turn out to be a brief short-covering event that fizzles out, she also says she wouldn’t be surprised to see it run a little bit longer given the "positioning dynamics and desire by U.S. equity market participants to rotate and for leadership to broaden out beyond the Mag 7."

BofA equity and quant strategist, Jill Carey Hall, believes that with Powell lowering the bar for a September rate cut, the Russell 2000 likely leads large caps in the coming weeks, and through September.

Hall adds that "The Russell 2000 has typically outperformed in the first 12m of a cutting cycle but performance is mixed in cutting cycles that didn't coincide with recessions. Today, cuts could spur greater near-term outperformance than historically given small caps' increased rate sensitivity/refi risk."

Meanwhile, of note, since just after the market's early-April lows, the small-cap Russell 2000 has outperformed the S&P 500 index .SPX.

On Friday, the RUT/SPX ratio hit its highest level since March 24.

(Terence Gabriel)

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