Small-cap recap/preview: Four weeks of growth, biotech in focus, volatility ahead

The main small-cap index has now risen for four weeks in a row. However, heightened volatility could be right around the corner as the Fed is set to make a rate decision midweek. Below is a recap of what happened in the small-cap space during the week of April 28-May 2 and what to expect in the week ahead.

Last week, the small-cap Russell 2000 continued to rise, climbing 3.2% to 2020.74 points, whereas the S&P 500 gained 2.9%.

This marked the fourth consecutive week of growth for the Russell 2000, which brought it close to levels seen before the so-called “Liberation Day” tariffs on April 2, when Trump announced a 10% levy on all imports to the U.S., with higher rates for dozens of countries. On Friday, May 2, the index closed about 1.2% below its April 2 closing level.

According to Freedom Broker’s weekly note, the biggest gains in the Russell 2000 came from companies with the largest market capitalizations, with tech names among the top contributors.

Last week marked the halfway point for the small-cap earnings season, with exactly half of the S&P SmallCap 600 companies having released their first-quarter financial results. Their combined earnings per share shrank 10.6%, while the market consensus had expected a 2.4% increase, as noted in the Freedom Broker report.

“This continues to point to an earnings recession in the segment,” Freedom Broker says, adding, however, that it is still too early to draw conclusions, as the overall picture is likely to change as more earnings come in. Moreover, investors are now more focused on companies’ statements regarding the potential impact of tariffs than on past quarterly results.

Freedom reports that biotech stocks were the most actively traded last week.

Regulus Therapeutics, which develops drugs for genetic diseases, came out as last week’s best performer, with a 180% gain. On Friday, the stock closed at $7.85 per share. On Wednesday, Regulus announced it had entered into a merger agreement with pharma giant Novartis, which will acquire the company for $800 million. The deal value could rise to $1.7 billion if Regulus obtains regulatory approval for its drug Farabursen, designed to treat the most common genetic cause of renal failure.

GeneDx, a developer of genetic tests, showed the weakest performance last week. Even though the company reported strong first-quarter financials, with revenue up 42% year over year and almost 10% above analyst expectations, the stock plunged nearly 40% over the week to close at $67.23 per share. “In our view, the decline is insignificant given the overall strength of the report, and the stock looks attractive for a speculative buy,” Freedom Broker says.

This week, 622 Russell 2000 companies and 214 from the S&P SmallCap 600 are due to release earnings. Freedom Broker recommends keeping an eye on the following small-cap names:

— Health care: Hims & Hers Health and LifeMD (today, May 5 and tomorrow, May 6, respectively);

— Cybersecurity: Qualys and Varonis Systems (tomorrow);

— Defense: Ducommun and Mercury Systems (tomorrow).

The key macroeconomic event for the markets will be the FOMC meeting on May 6-7, with a rate decision on Wednesday. A cut is unlikely, Freedom Broker writes. The press release and Chair Jerome Powell’s comments will be watched for clues about the Fed’s future plans.

Freedom warns that small caps could see increased volatility on Wednesday, as the segment is often seen as sensitive to changes in interest rates.