Small caps break out to a new high. May keep rallying heading into year-end

Small Cap Stocks Reach New Highs, Offering Fresh Growth Opportunities for Investors This Year

Imagine you’re at a school fair, and everyone is crowding around the biggest ride—the Ferris wheel. But suddenly, the smaller games and booths start giving out better prizes. That’s a bit like what’s happening in the stock market right now with small-cap stocks.

Why This Matters for Investors

Small-cap stocks—companies that aren’t as big as giants like Apple or Microsoft—just hit a record high. For investors, this could mean new ways to grow your portfolio, especially if you’ve only been focusing on the large, well-known companies.

Bullish Case: Why Small Caps Could Shine

  • Fresh Highs: The Russell 2000, which tracks small companies, just broke its old record from November 2021 and is up about 0.8% in recent trading—twice the gain of the S&P 500.
  • Fed Easing: The Federal Reserve is hinting at making borrowing easier. This usually helps smaller companies more because they often need loans to grow and are sensitive to interest rates.
  • Possible Breakout: Some experts, like Katie Stockton from Fairlead Strategies, think the Russell 2000 could jump even higher if it stays above its old highs for a couple of weeks in a row.
  • Mergers and Growth: Lower borrowing costs and more business deals could help small companies’ profits, making their stocks more attractive.

Bearish Case: Risks and Worries

  • Not Always Profitable: Some experts warn that small caps are “structurally inferior”—meaning they often make less money and can be riskier than big companies.
  • Pockets of Hype: Some small-cap stocks leading the charge are tied to trendy sectors like crypto, nuclear energy, or quantum computing, which can be volatile and unpredictable.
  • Market Pullback: Katie Stockton also warns the overall market (especially big tech stocks) could take a dip soon, which might spill over to small caps.
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Looking at the Numbers

Historically, small caps have periods where they leap ahead of large caps—especially after the Federal Reserve starts lowering interest rates. For example, after the 2008 financial crisis, the Russell 2000 gained about 25% in the following year, outpacing the S&P 500 (source).

What Could Happen Next?

Some experts think small caps have more room to run. Steven DeSanctis from Jefferies predicts the Russell 2000 could rise another 7% by year-end. By comparison, he doesn’t see much more upside for the big companies in the S&P 500 right now.

Investor Takeaway

  • Consider adding some small-cap stocks or funds to your portfolio if you’re mostly invested in big companies.
  • Watch for signs that the Federal Reserve will keep making borrowing easier—this could keep helping small caps.
  • Don’t chase the trendiest small-cap stocks (like crypto or quantum computing) without doing your homework—they can be risky.
  • Remember, small caps can be more volatile, so balance them with other investments.
  • Stay alert for possible market pullbacks, especially in big tech, which might affect everything else.

For the full original report, see CNBC

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