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Small-cap stocks are all fired up ahead of the Federal Reserve's anticipated interest rate cut, enjoying their moment in the spotlight. Over the past week, the Russell 2000 Index surged more than 5%, outperforming its larger-cap cousins in the S&P 500 Index, which only gained about 2.5%.
Chart created using Benzinga Pro
Evidently, the Russell 2000 Index-tracking iShares Russell 2000 ETF (IWM) has outperformed the S&P 500 index-tracking SPDR S&P 500 ETF (NYSE:SPY). Among those driving small-cap performance over the past week are stocks such as IGM Biosciences Inc (NASDAQ:IGMS), Intuitive Machines Inc (NASDAQ:LUNR) and Applied Therapeutics Inc (NASDAQ:APLT) which are up 59.33%, 38.62% and 44.90%, respectively, over the past five days.
Don't miss out on this unparalleled opportunity:
Investors seem convinced the Fed is about to ease up, and small caps—especially those burdened by debt and tied to floating rates—are reaping the benefits.
Here's why: small-cap companies tend to rely on floating-rate debt, meaning when interest rates drop, their borrowing costs fall too. In theory, this frees up cash and makes life a little easier for companies with shakier balance sheets. So naturally, rate cuts have investors licking their chops over the potential for outsized gains in these smaller stocks.
But before you jump on the small-cap train, there's a wrinkle.
While the prospect of cheaper borrowing is exciting, the markets are also buzzing with talks of sluggish earnings and a murky U.S. economic outlook. Thus, the hype around small caps could fizzle if the economy doesn't hold up its end of the bargain.
For investors looking to get in on the action, exchange-traded funds like the IWM or the Vanguard Small-Cap ETF (NYSE:VB) provide diversified exposure to small-cap stocks. These funds track the performance of small-cap indexes and are great ways to benefit from potential gains without handpicking individual stocks.
Still, there's the question of how long this rally will last.
Chart created using Benzinga Pro
The IWM, proxy for small cap stocks, is exhibiting a strong bullish trend, with its share price of $219.23 positioned above the five, 20, 50 and 200-day simple moving averages (SMAs).
Specifically, the eight-day SMA at $213.80, the 20-day SMA at $215.07 and the 50-day SMA at $214.41 all suggest a bullish signal, reflecting the ETF’s robust upward momentum.
Despite the strong bullish trend, IWM is currently experiencing slight selling pressure, indicating potential short-term volatility. The ETF’s position well above its 200-day SMA of $203.57 further supports a positive technical outlook, suggesting continued strength in the small-cap sector.
If the Fed goes big with a half-point cut, small caps might steal the show. But even a modest 25-basis-point cut could keep the rally alive—for now.
Investors may want to keep an eye on the SPDR S&P 600 Small Cap ETF (NYSE:SLY) for broader exposure to small-cap companies that might benefit from lower rates.
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Image created using artificial intelligence via Midjourney.
