July 13, 2025
As the S&P 500 consolidates just below fresh all-time highs, we are seeing some near-term buying in the Small Cap. space. The chart below shows various Russell and S&P benchmark indices by size and their performance against the broad market R3K since the April 7th low for equities. The Russell 2000 briefly moved above the Large and Mega Cap. benchmarks last week before pulling back on Friday.
When we compare the internal strength of the Russell 2000 Index vs. the S&P 500 (using the IWM as a proxy for the former) we can see that the R2K (below, top chart, middle panel) boasts more stocks above their 50-day moving average than the S&P 500 (below, bottom chart, middle panel). We interpret YTD new highs in the series as confirmation of the emerging bull trend as investors continue to add beta exposure to their portfolios in line with the emerging bullish consensus on global trade.
IWM Internals
S&P 500 Internals
We had been expecting rotation into higher beta leadership to come at the expense of Mega Cap. Growth stocks, but that hasn’t exactly been the case. The Roundhill Magnificent Seven ETF (MAGS) has traded to fresh recovery highs in June on continued buying in NVDA, MSFT and META despite some headwinds for Alphabet, Apple and Tesla in the near-term.
As we pointed out in our Factor Friday piece, high beta is preferred over momentum at this juncture and we think that tracks to a continued bid for economically sensitive exposures like Energy, Industrials and Materials stocks, along with cyclical names in other sectors.
This is different than a Growth to Value rotation as min vol. exposures are being disdained. We can see this in the relative performance of defensive sectors vs. the S&P 500 (chart below, panel 2), as investors have abandoned those positions since the equity market low on April 7, 2025.
One thing to keep in mind as the near-term dynamic seems to be “risk-on”, when small cap. stocks have outperformed in the past, it hasn’t often been a good environment for stocks in general. The chart below shows the Russell 2000 going back to 1988. The 3 longest periods of sustained outperformance for small cap. stocks during that time were 1990-1993, 1999-2006 and 2008-2011. We’re willing to bet no one who is upping their beta exposure is doing so because they think either of those 3 recessionary periods are on the horizon. We think that in itself makes this something to pay attention to.
The move sanguine interpretation is that there’s a bid for small cap. based on USD weakness stemming from global trade realignment. Onshoring and logistics are about to become a focus. M&A potential is likely elevated and small cap. stocks are often the targets when the global supply chain is faced with sudden change. We also note that small cap outperformance is happening at the expense of the average stock in the S&P 500 as the equal weighted index (chart below) has moved into negative territory vs. the cap. weighted benchmark (chart below). That leads us to believe this is more about defensive-to-offensive rotation, but if the mega cap.’s roll over as well, we may see small cap. strength but equity weakness generally.
So please, keep in mind that strength in Small Cap. stocks has a potential double-meaning. Our process has us positioned for continued higher prices, but this rotation which appears on the surface as bullish re-risking, could end up being something very different.
Patrick Torbert, Editor & Chief Strategist, ETFSector.com
Data sourced from FactSet Research Systems Inc.
