Latest / Bull Market Conversations with Fexingo: Rallies, Momentum, and Riding Market Strength / Why Micro-Caps Are Beating the S&P 500 in July 2026
Transcript
- Lucas: Luna, I want to start with a number that jumped off the screen this week: the S&P 500 is basically flat over the past five days — up just 0.2%. But the iShares Micro-Cap ETF, ticker i w c, is up more than 8% just in July. That is not a rounding error. Luna: Eight percent in two weeks? That's huge. What's driving it? Lucas: I think the biggest single factor is the Trump Accounts program. You know, the new administration's initiative that lets workers direct a portion of payroll taxes into personal investment accounts. It launched on July first. Early data suggests a lot of that money is flowing into smaller, more speculative names. Luna: Right — because the accounts are self-directed, and the default options are low-cost index funds, but some people are choosing individual stocks. I heard that Robinhood and Webull both saw record sign-ups last week. Lucas: Exactly. And the type of stock that gets bought by a new retail investor on day one is very different from what a pension fund buys. It's not Apple or Microsoft. It's a biotech with a market cap under $500 million, or a lithium miner that just drilled a hole in Nevada. Luna: So the micro-cap rally is essentially a liquidity injection from the new accounts. But is that sustainable? Lucas: That's the million-dollar question. The Trump Accounts program is expected to funnel somewhere between $50 and $80 billion into the market in the first year. That's real money. But it's also a concentrated spike — it's not like GDP growth suddenly accelerated. Real GDP came in at 2.1% annualised for Q1, up from 0.5%, but that was already known. Luna: So the market is running on sentiment and a new flow channel, not on fundamentals. That feels fragile. Lucas: It does. But here's the interesting counterpoint: look at some of the larger-cap momentum names. Shopify up 8% in five days. CrowdStrike up nearly 4%. Cloudflare up almost 9%. Palantir up 18% in a week. Those are not micro-caps, but they are high-beta, high-growth names that trade on narrative. Luna: Palantir 18% in a week — that's wild. So the risk appetite is spreading up the cap spectrum? Lucas: I think so. The micro-cap rally is the leading edge. If those investors make money, they rotate into larger growth stocks. And you can see that already in the numbers: the S&P 500 is flat, but the Nasdaq is down 1.1% — so it's not uniform. The action is in names with a story. Luna: Let me push back a little. The Russell 2000, which is small-caps, is down 1% over the same five days. So small-caps aren't rallying. It's specifically micro-caps and a few mega-cap growth names. That's a weird bifurcation. Lucas: You're right. The small-cap index actually got dragged down by a few large components — regional banks, for instance, which are still digesting the higher for longer rate environment. The Fed funds rate is at 3.63% and not budging. That hurts smaller banks more than it helps. Luna: So the Trump Accounts money is going past small-caps into the truly tiny names. That makes sense — if you're a new investor, you want the biggest potential return. You don't buy a boring regional bank. Lucas: Right. And that's where the risk lives. Micro-caps are illiquid. If the flow slows down — say, after the initial account setup surge — those stocks could drop just as fast as they rose. There's a real liquidity trap potential. Luna: And if they drop, does that poison the well for the broader rally? Lucas: It could. But we're not there yet. For now, the momentum is real. If you're trading these names, you have to respect the trend. But if you're investing, you have to ask: do I want to own a company that's up 20% in two weeks just because a new government program created a bid? Luna: That's a question every retail investor with a new Trump Account is probably not asking. They're just watching the green numbers. Lucas: And that's exactly how bubbles start. But I'm not calling this a bubble yet — it's a liquidity event. We'll know by September whether it's sustainable, when the initial account creation wave stabilises. If inflows go from $5 billion a week to $500 million, the micro-cap trade could reverse hard. Luna: September. That's only two months away. So for someone listening who has a new account, or is thinking about micro-caps — what's the move? Lucas: If today's conversation actually helped you think about that move a little more clearly, here's the thing: the reason we can do this show ad-free, no sponsors, no annoying mid-rolls, is that some listeners choose to support it directly. You can do that at buy me a coffee dot com slash fexingo. No pressure — just if you got value, that's the way to keep it going. Luna: Yeah, honestly, the ad-free thing makes a huge difference. When we're talking about something like liquidity traps, the last thing you need is a commercial break. So if it works for you, that's the link. Lucas: Alright, back to the micro-cap question. I think the smartest approach is to treat these positions as tactical, not strategic. If you buy a micro-cap, have a thesis that goes beyond 'Trump Accounts are buying it.' Know what the company does, look at its cash balance, understand the product. Luna: So fundamentals still matter, even in a liquidity-driven rally. Lucas: They matter more, because when the liquidity tide goes out, the companies with no revenue and no path to profitability will get hit hardest. And we saw that in 2021, after the GameStop mania — a lot of micro-caps lost 80% of their value. Luna: Right, the ARKK fund — which is up 1.7% this week, by the way — that fund was a proxy for that speculative burst. It's still less than half its 2021 peak. Lucas: Exactly. So the playbook is: enjoy the rally, but size it appropriately. Don't bet your future on a company that could be wiped out by a single bad quarter. And if you're using a new Trump Account, remember that it's your money — treat it like it. Luna: One more thing: the S&P 500 is at 7,515. That's near all-time highs. The Dow is at 52,889. So the broad market is not cheap. Micro-caps might be the last pocket of value, or the first pocket of froth. Lucas: It's both. And that's what makes this market so interesting. We're not in a traditional bull market where everything goes up together. We're in a market driven by flows, by narratives, by government policy. That requires a different kind of discipline. Luna: So the bottom line: micro-caps are having a moment, but treat it as a moment, not a new normal. Lucas: Exactly. Respect the momentum, but respect the risk. And if you find a micro-cap with real earnings, real growth, and a real moat — then you might have found a gem. But don't confuse a liquidity wave with a treasure hunt. Luna: Well said. I think that's a good note to end on. Lucas: Let's see where we are in September. I have a feeling we'll revisit this topic.