Mike
Long-Term Investor, Technology & Crypto
High interest rates are hurting US small caps. The Russell 2000 is retesting its May lows even while the Dow is up and the S&P 500 is only slightly lower. x.comÂ
A suspected crash and liquidity squeeze make small-cap longs unattractive initially. x.comÂ
US small caps are set to outperform as capital rotates down the cap structure, as it does when a bull market broadens. After years of lagging megacaps, small caps historically run hardest in the back half of a bull, once megacap leaders are extended. Breadth is widening, with over 30% of S&P 500 members beating the index in 2025, the best since 2021. The Fed is easing into strength, and rate cuts that lower discount rates and cheapen financing especially help small caps and long-duration growth. … Show more
Small caps are more sensitive to higher rates, so they will suffer and underperform as yields climb, and today's move is just an oversold bounce. Fed fund futures are at 3.75%, and other Treasury yields are already higher, so the market is effectively there already. Another rate hike may not make much difference on its own, but not every stock can handle this level of rates. x.comÂ
Bond pressure should weigh on US small caps. IWM is also losing its long-term trend line. x.comÂ
Falling rates and buying in financials, consumer discretionary and Home Depot make US small caps a very good buy here with high probability. The drawdown exceeds 11%, as it did at the start of the Iran war, and daily RSI and MACD are at similar bottoms. x.comÂ
Growth stocks should keep outperforming small caps because rising rates now hurt small caps far more. Large-cap and AI-linked growth companies are cash-rich and lightly financed, while about a third of Russell 2000 debt is floating-rate versus roughly 6% for the S&P 500. As hike expectations returned, small caps' lead over the S&P 500 shrank from about 11 points in June to about 2, and IWM tracks long bonds far more than QQQ. The ARKK/IWM ratio has reclaimed its rising 20-month Bollinger basis. … Show more
US small caps are a classic investment trap because IWM earnings per share have consistently disappointed while S&P 500 earnings per share have consistently over-delivered. Investors mistake smaller companies for greater upside. x.comÂ
A seasonal bottom ahead of maximum seasonal bullishness favors US small caps now. Stock Traders Almanac says the Russell 2000 is down 11% from its August 14 high and expects small caps to bottom in mid-to-late October before rallying into year-end. x.comÂ
Small- and mid-cap earnings growth does not support buying the group. A CNBC guest cited earnings as a catalyst for purchasing IWM, but the EPS growth is not coming from small- or mid-cap companies. x.com x.comÂ