Latest / Bull Market Conversations with Fexingo: Rallies, Momentum, and Riding Market Strength / How Small Caps Are Quietly Rebuilding Amid the June 2026 Bull Market
Transcript
- Lucas: So the S&P 500 and NASDAQ have basically gone sideways the last five days, but the Russell 2000 is down one and a half percent. That sounds like small caps are getting clobbered, right? Luna: That's the headline. But when you dig into the components, it's not uniform. There's actually a pretty interesting rotation happening underneath. Lucas: Exactly. I was looking at the Russell constituents that reported earnings last month. About 62 percent of small-cap companies beat estimates, and the aggregate earnings growth rate for the index is now running ahead of the S&P 500 for the first time since 2023. Luna: That is a big shift. And it's happening while the Russell is trading at roughly 15 times forward earnings, versus the S&P at 21 times. That valuation gap is as wide as it's been in over twenty years. Lucas: If our conversations about market data and company earnings have helped you think about a decision differently, I just want to mention something briefly. We keep this show ad-free on purpose — no sponsors, no annoying mid-roll breaks. The way we sustain that is through listeners who find value here and choose to support. Luna: Yeah, it's a simple model. If you want to be part of keeping it that way, the link is buy me a coffee dot com slash fexingo. No pressure, just an option. Lucas: So back to the data — that valuation gap. Normally when small caps are that cheap relative to large caps, it's because earnings are deteriorating. But here, earnings are actually accelerating. That's the part that feels different. Luna: Right. And you're seeing some of that quality rotation play out in names like CrowdStrike and Datadog. Both are up more than 11 percent in the last five days, even as the broad market is flat. Those are mid-cap growth stories that are attracting flows. Lucas: CrowdStrike specifically — it's up 11.4 percent in five days. That's not a small cap, but it's in that sweet spot of companies that started as small caps and are now scaling rapidly. The cybersecurity theme has legs, and the market is rewarding execution. Luna: Datadog even more so, up 16 percent. That's a software observability platform that's been a favorite among growth investors. The move suggests there's still appetite for high-growth names that can show durable revenue expansion. Lucas: So let's connect the dots. The Russell 2000 is down on the surface, but underneath, you've got improving earnings, cheap valuations, and active managers starting to increase exposure. Historically, when that combination occurs, small caps tend to catch up within six to twelve months. Luna: I saw a note from Bank of America this week saying their fund manager survey showed a net 18 percent of respondents are overweight small caps, up from 8 percent in April. That's a meaningful shift. Lucas: And it's not just domestic investors. Foreign buyers are dipping in too, because the dollar has been relatively stable and U.S. small caps offer a discount compared to their European and Asian peers on a price to book basis. Luna: What's the biggest risk to this thesis? If the economy slows more than expected, small caps are typically more sensitive to GDP growth because they have less pricing power and higher debt loads. Lucas: That's the sword of Damocles. Real GDP growth annualized is only 1.6 percent as of the first quarter. That's not robust. So a lot depends on whether we get a soft landing or something worse. But the earnings data suggests many small companies have already adjusted their cost structures. Luna: They've had to. The interest rate environment with the fed funds rate at 3.63 percent has forced them to be more disciplined. Companies that survived the last two years are leaner. Lucas: I think that's the key insight. The small-cap index is being dragged down by a handful of money-losing biotech and energy names, but the profitable part of the index — the industrials, the tech services firms, the niche manufacturers — those are actually performing well. Luna: So the Russell 2000 is a misleading headline. The real story is a bifurcation within small caps. You've got the haves and the have-nots. Lucas: Exactly. And if you're an investor, the opportunity might be in that haves category — the companies with positive free cash flow, growing revenues, and reasonable debt. Those are the ones that could lead the next leg of this bull market. Luna: We should note that the Russell 2000 is still up about 8 percent year-to-date. It's not like it's been left behind entirely. Just relative to the S&P's 12 percent, it looks weak. Lucas: Right. And that gap could close if we get a catalyst — maybe a Fed rate cut later this year, or a clearer economic outlook. The market is pricing in a hold for now, but if the data softens, small caps could benefit disproportionately. Luna: One other thing: the IPO market is starting to thaw. If more small companies go public, that could bring fresh supply and also fresh attention to the space. Lucas: We've seen a few filings lately. Not blockbusters, but steady. And the SPAC market has quieted down, which means the quality bar is higher. That's healthy. Luna: So to sum up: small caps are cheap, earnings are improving, and flows are starting to turn. But it's a stock picker's market — the index masks the dispersion. Lucas: I'd say that's a fair summary. And if you're looking for names, the ones that have already proven they can grow in a high-rate environment are the ones to watch. Companies like CrowdStrike, Datadog, and some of the industrial plays that are benefiting from reshoring. Luna: Any specific industrial names you'd highlight? Lucas: I don't want to give individual stock picks on air, but I will say that the reshoring theme is real. Companies that make electrical components, automation equipment, and specialty materials are seeing orders pick up. The CHIPS Act money is starting to flow, and that's showing up in small-cap supplier revenues. Luna: That's a good lead for listeners to do their own homework. The data is there — it's just about parsing the Russell 2000 carefully. Lucas: Exactly. Don't buy the index blindly. But if you're willing to dig, there's a lot of value hiding in plain sight.