MW Why it'll be a sizzling summer for these underdog stocks

By Barbara Kollmeyer

Evercore strategist says June is ripe for smaller stocks to outperform

The direction is pointing south for stocks, as lingering trade worries stick to this market, though investors managed to shake that off on Monday. That setup could work again for Tuesday.

The S&P 500 SPX is only 3.78% off its February highs, after May's record gains, though it remains to be seen if the rally will keep going through the long days of summer. That's as other segments of the market have been thoroughly overlooked when it comes to buying the dip this year.

For example, the Russell 2000 RUT is down 7.17% in 2025, and sits over 15% away from the record close seen in Nov. 2021. That's versus a near 1% rise for the S&P 500 so far this year.

That brings us to our call of the day from a team at Evercore ISI, led by Julian Emanuel, who say June marks the best seasonal opportunity for small-cap stocks, so dive in.

They note that large-cap stocks have outperformed smaller names by 9% through May, an underperformance for the latter that isn't too hard to understand. Tariff uncertainty and stress has hit smaller companies that are more domestically focused and vulnerable to interest rates and consumer moods.

But Emanuel and his team argue that the month of June, which aligns with the Russell Index rebalance, has historically favored smaller companies. "Moreover when large size outperformance through May had been similarly vigorous as it was in 2025, June seasonality is especially pronounced," they said.

So they see a "catch-up" window coming for the month of June, when small-caps will push ahead of large companies. "The case for small cap outperformance is reinforced by an attractive multiple relative to large, and with the Fed on track to cut rates further while the economy is forecast to grow modestly in 2025."

Emanuel and his team suggest investors get broad exposure to smaller stocks via the iShares Russell 2000 ETF IWM.

While overall, small cap has struggled, the ETF has some names that have performed strongly this year, such as Hims & Hers Health $(HIMS)$, up 134%, which got a boost in April from joining with rival Novo Nordisk, behind the weight-loss drug Wegovy. Sprouts Farmers Market $(SFM)$ is up 41%, and some money managers like the organic grocery store for the fact it has locally produced foods that can shield it from tariff wars.

To be fair, it would seem a call for small-cap stocks is fairly contrarian as many Wall Street banks have steered clear of discussing the beaten down sector. However, Fundstrat Global Advisors' head of research Tom Lee has also made the case for small-caps.

He said when investors start to believe the tariff stress is behind them, and start to look into 2026 and realize a dovish Fed is likely next year, beaten down small-cap stocks will look like a smart play.

Read: 20 stocks primed for rapid growth while trading at half of Nvidia's valuation

The markets

U.S. stock futures (ES00) (YM00) (NQ00) are lower, with Treasury yields BX:TMUBMUSD10Y pulling back, while the dollar DXY has regained some footing, but gold (GC00) is weaker.

   Key asset performance                                                Last       5d     1m      YTD      1y 
   S&P 500                                                              5935.94    2.29%  5.05%   0.92%    12.35% 
   Nasdaq Composite                                                     19,242.61  2.70%  7.84%   -0.35%   14.34% 
   10-year Treasury                                                     4.425      -2.40  12.30   -15.10   9.40 
   Gold                                                                 3379.1     2.41%  -1.82%  28.03%   44.01% 
   Oil                                                                  62.83      2.88%  6.49%   -12.58%  -13.84% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

The buzz

Blaming Trump's tariffs, the OECD has trimmed its growth forecasts again, and sees the U.S. economy growing just 1.6% this year from a 2.2% prediction in March.

Microsoft $(MSFT)$ is reportedly cutting hundreds more jobs.

Factory orders and job openings are due at 10 a.m., followed by a handful of Fed speakers including Fed Gov Lisa Cook at 1 p.m.

China's Caixin manufacturing purchasing manager index slumped to 48.3 in May from 50.4, its worst since September 2022 and below market expectations. Copper (HG00) and U.K.-listed miners were feeling the pain.

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The chart

Manish Kabra, head of U.S. equity strategy at Societe Generale, says while the S&P 500 is up just 1% this year, it's turned out "strong and consistent for thematic investors." They prefer U.S. industrials, financials and software over semiconductors, reshoring beneficiaries, domestic U.S. supply chain stocks to name a few. Four executive U.S. orders to speed up approval for nuclear reactors for defense and AI purposes have also made the nuclear theme popular, he said.

Top tickers

These were the most active tickers on MarketWatch as of 6 a.m.:

   Ticker  Security name 
   NVDA    Nvidia 
   TSLA    Tesla 
   GME     GameStop 
   PLTR    Palantir Technologies 
   NIO     NIO 
   AAPL    Apple 
   TSM     Taiwan Semiconductor Manufacturing 
   AMZN    Amazon.com 
   AMD     Advanced Micro Devices 
   APLD    Applied Digital 

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(END) Dow Jones Newswires

June 03, 2025 06:58 ET (10:58 GMT)

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