Latest / Bull Market Conversations with Fexingo: Rallies, Momentum, and Riding Market Strength / Why Small Caps Are Outperforming in June 2026
Transcript
- Lucas: So the Russell 2000 is up three point one percent over the past five days. The Dow is up less than one percent. The NASDAQ is actually down slightly. That's a pretty clear message about where money is flowing right now. Luna: Yeah, that's a big gap. The Russell has been lagging for so long — what's changed? Lucas: Well, a couple of things. First, the GDP data we got in January showed real GDP growth annualized at one point six percent, up from just half a percent the previous quarter. That's not booming, but it's steady. And the Fed funds rate is effectively flat at three point six three percent. No big moves expected. Luna: So the economy is stable, rates are stable — that favors smaller companies that are more sensitive to domestic growth and borrowing costs. Lucas: Exactly. And when you look at the big growth stocks like Cloudflare, down almost eight percent in a week, or Palantir down over six percent, it's clear that money is rotating out of high-multiple names and into more value-oriented small caps. Luna: The Russell's gain is broad-based, or is it just a few sectors? Lucas: It's pretty broad. Financials, industrials, materials — the cyclical stuff. These are companies that benefit from a steady growth environment. And they've been cheap relative to the mega-caps for a while. Luna: I remember last year everyone was saying small caps were dead. Now they're leading. Lucas: Right. And it's not just one week. The Russell is up about ten percent year-to-date, while the S&P is up maybe six or seven. The rotation has been building for a couple of months. Luna: What's driving the selling in names like Cloudflare and Datadog? They're not exactly distressed. Lucas: No, they're great companies. But their valuations were priced for perfection. Cloudflare trades at over two hundred dollars with a P/E north of eighty. When rates stay higher for longer, the present value of those future earnings gets discounted more. So investors rotate into things like regional banks or industrial REITs that have near-term earnings visibility. Luna: So it's a valuation reset, not a fundamental problem. Lucas: Exactly. And it's healthy for the market overall. A bull market that's only driven by five stocks isn't sustainable. You want breadth. And we're seeing it. Luna: The Dow's gain of zero point eight percent is modest, but it's holding. The NASDAQ's dip is minor too. It's not a crash — just a rotation. Lucas: No, this is orderly. The S&P is still near all-time highs. But the real story is the Russell. Three point one percent in five days is a big move. And it's happening on decent volume. Luna: So if you're an investor, how do you play this? Do you chase the Russell now? Lucas: Chasing is never a great idea. But it does suggest that if you've been overweight mega-cap growth, it might be time to rebalance. Not sell everything, but add some exposure to small caps through an ETF like IWM or a value fund. Luna: And the economic backdrop supports it — GDP growth ticking up, rates steady. Lucas: Right. And let's not forget that small caps tend to do well when the yield curve is steepening. We're not there yet, but the curve has been normalizing. Luna: One thing I find interesting: the Dow is up, the Russell is up, but the NASDAQ is flat to down. That's a classic rotation signal. Lucas: It is. And it's also worth noting that the New York Stock Exchange composite index — the NYA — was up one point six percent. That's a broad measure of all stocks listed on the NYSE, not just the big ones. So the breadth is real. Luna: What about the IWF — the iShares Russell 1000 Growth ETF? That was down one point one percent over the week. So growth is underperforming. Lucas: Yeah, the growth index is getting hit. And the Russell 2000 value index is probably doing even better than the overall Russell. So it's a value play right now. Luna: How long do you think this rotation lasts? Is it a summer fling or a long-term shift? Lucas: That depends on earnings. If small caps can deliver earnings growth in the second half, and if the economy stays steady, it could have legs. But if we get a recession scare, money will fly back to the mega-caps. Luna: And the Fed is likely on hold for a while. So rates aren't going to be a catalyst either way. Lucas: Exactly. The next big data point is Q2 GDP, which we'll start getting hints of in July. And then earnings season in July and August. That'll tell us if this is real. Luna: So for now, it's a market that's broadening out. That's generally healthy. Lucas: It is. And it's a reminder that the market is always changing. The stocks that led last year may not lead this year. Luna: Speaking of which, if our conversations have helped you think about your portfolio or just understand the market a bit better, you can support the show at buy me a coffee dot com slash fexingo. It's a simple way to keep us ad-free and independent. Lucas: Yeah, we really appreciate that. It helps us keep doing these dives into the data. And it's totally optional — no pressure. Luna: So back to the rotation — one sector that's been surprisingly strong is cybersecurity. CrowdStrike was up three point six percent this week. That's not a small cap, but it's interesting. Lucas: CrowdStrike is a high-growth name that's actually working. Its earnings have been strong, and it's seen as a must-have for enterprises. So it's a reminder that not all growth is being sold — only the ones with questionable valuations. Luna: Right. So the market is discriminating. It's not just 'sell growth, buy value' — it's 'sell expensive growth, buy cheap value'. Lucas: Exactly. And that's what a healthy bull market does. It rewards discipline. So if you're looking at small caps, focus on companies with solid balance sheets and positive free cash flow. Not just any small cap. Luna: Good advice. I think the key takeaway for listeners is: pay attention to where the money is flowing, but don't chase. Use the data to inform your rebalancing. Lucas: Well said. And we'll keep watching the Russell to see if this momentum continues.