Shares of small-cap stocks yesterday, August 13, significantly outperformed the Magnificent Seven, CNBC notes. The latest inflation data boosted investor expectations that the Fed could begin cutting interest rates as early as September. That event would likely spur consumer spending and lower borrowing costs, with smaller companies traditionally seen as the main beneficiaries in this scenario.

Details

The Russell 2000 jumped almost 2% yesterday, while the S&P 500 broad-market index added only 0.3%. It was held back by major tech stocks: the CNBC Magnificent 7 Index, which tracks seven mega-cap tech companies, fell 0.3%, despite hitting a 52-week high at one point in the session.

With Wednesday’s gain, the Russell 2000 has added more than 5.5% this week, on track for its best week since November, CNBC writes.

Outperforming names

The top performers among small-cap stocks on Wednesday included:

  • Chemours, an industrial chemicals producer, up 18.0%;

  • Hillenbrand, a "diversified industrial company" that is the largest maker of caskets, up 12.6%;

  • Dream Finders Homes, a residential developer, up 13.0%;

  • Jack in the Box, a fast-food chain, up 12.0%;

  • Arrowhead Pharmaceuticals, a biotech, up 12.3%.

Fed policy crucial for small caps

The rally in small-cap stocks comes amid growing investor confidence that the Fed will cut interest rates at the September 16-17 FOMC meeting. Following the encouraging inflation data released Tuesday, traders now put the odds of a September rate cut at nearly 100%, based on CME FedWatch. That is up from 85% before the inflation print and less than 60% a month ago.

Lower interest rates tend to benefit smaller companies disproportionately, as many rely on debt to fund operations, expand warehousing capacity, and/or finance growth. The Fed has held rates steady since last December, partly due to uncertainty over the impact of tariffs on inflation.

“If the Fed cuts rates in September, this would greatly benefit small caps, as many small caps are levered to the economy and also financially,” said Larry Tentarelli, founder of the Blue Chip Trend Report, as quoted by CNBC. He called small caps a “rate cut rotation” play.

Weaker-than-expected U.S. inflation suggests it may be time to pivot into small-cap stocks and other risk assets, Morgan Stanley said days ago.

Meme momentum

"Our data shows that retail investors were more focused on small-caps in the crypto/AI/retail/quantum-computing spaces during the past several weeks than on large-cap names," wrote Goldman Sachs strategist John Marshall in a note cited by CNBC. "We see further upside, as the case for a September rate cut is more likely."

Marshall notes that "recent weeks have seen a resumption of retail buying activity in S & P 500 and [Nasdaq] 100 stocks, and we believe the meme stock resurgence has spread into the broader buying of large-cap stocks,” adding “given the pickup in retail trading, we see the potential for elevated upside asymmetry in stocks with high retail participation in the coming week."

According to Goldman, the S&P 500 stocks with the highest retail participation over the past month in terms of net retail activity were Palantir ($1.2 billion), Advanced Micro Devices ($774 million), Warner Bros. Discovery ($167 million), KeyCorp ($163 million), UPS ($123 million), and Electronic Arts ($42 million).

Marshall recommends clients buy call options on these stocks. However, he warned the retail momentum could be derailed if new data ahead of the Fed’s September meeting shows a reversal to the upside in inflation trends.

The AI translation of this story was reviewed by a human editor.

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