Rosenberg Research head says small-cap rally like 'going to the casino'
In an interview, David Rosenberg explains why the rally is speculative and 'to a large extent junky'
In the new year, the Russell 2000 index has beat its all-time high eight times. / Photo: Unsplash / Roberto Júnior
David Rosenberg, founder and head of Rosenberg Research, believes the optimism around small caps is unwarranted. In his view, the recent record-breaking performance of the Russell 2000 index reflects speculative excess rather than an improvement in business fundamentals, which makes the rally highly fragile.
Details
“I sort of chuckle when everybody is talking about the Russell 2000,” Rosenberg said in an interview with CNBC. “I would probably rather talk about the S&P [SmallCap] 600, which at least are quality companies. I mean, there is not a junkier index out there than the Russell 2000.” Rosenberg argues that the rally has been driven by companies with weak or nonexistent earnings. “When you look at what the stock market has done since 'Liberation Day,' the companies that make no money or lose money, their stocks in aggregate have outperformed companies that make money by 2,000 basis points,” he said.
In his assessment, this dynamic underscores the speculative nature of the current market environment. “So yeah, I guess this is going to the casino,” Rosenberg said. “This is what the stock market has become."
Rosenberg also dismissed the idea that the rally is genuinely broadening beyond tech. According to him, the dominance of AI has simply spread into other sectors. “The technology dominance has spread its tentacles through so many other aspects of the stock market,” he said, noting that investors are buying energy infrastructure, utilities, pipelines, and financials because they expect those sectors to benefit indirectly from AI driven activity, including M&A and IPOs.
He added that the rally is not being driven by interest rates. “I think just what is happening in the stock market is not about interest rates,” Rosenberg said. “It is about a buoyancy and incredible investor confidence over the future.”
Context
Rosenberg’s remarks come as small-cap stocks post record gains. Since the start of January, the Russell 2000 has set eight all-time highs and has outperformed the S&P 500 for 14 consecutive sessions. According to the Wall Street Journal, this is the longest stretch of small-cap outperformance versus large caps since May 1996.
The rally in the Russell 2000 has gained momentum as investors diversify away from Big Tech amid concerns about stretched valuations, Bloomberg reported. Optimism has also been supported by Fed easing, with three rate cuts last year.
