Investor Interest in Small-Cap Stocks Keeps on Surging

Small-cap stocks moved higher early Tuesday. The Russell 2000 was recently up nearly 1%, outperforming the S&P 500 in morning action.

The morning’s trading follows a surge in interest in smaller shares. DataTrek Research said in a note Monday that, based on Google Trends, searches for “IWM”—the iShares Russell 2000 exchange-traded fund—recently jumped to multiyear highs.

That comes as the index itself has climbed lately, outperforming the S&P 500 over the past month and, according to Goldman Sachs research, posting its best performance against the Nasdaq 100 since 2002 in a recent two-week period.

“Now, the Russell’s longer-run underperformance versus the S&P 500 has started to reverse, and small investors are taking notice,” DataTrek wrote. “Attention drives capital flows. When that focus and money goes into a single stock, it is fair to call it a ‘meme’ investment.”

Interest Rate Outlook, Earnings Reports in View

Some of their recent rise can be attributed to investors’ belief that interest-rate cuts are on the horizon, since lower rates can benefit smaller companies that often carry more debt than their larger counterparts. Second-quarter earnings, however, could take some steam out of smaller shares if they point toward a weaker second half—especially, perhaps, if big companies turn in stronger results.

DataTrek believes small caps can continue to perform. “When that interest and capital flows to an entire segment of the market, we have trouble dismissing it outright as a fad,” its note read. “No doubt U.S. small caps will be volatile over the next few months, but we still believe they can do well” over the balance of the third quarter.

Comerica Wealth Management predicts two interest-rate cuts this year, a backdrop it said Monday provides “the potential for future tailwinds as the U.S. economy avoids recession.”