Latest / Bull Market Conversations with Fexingo: Rallies, Momentum, and Riding Market Strength / How Small Caps Are Outperforming in June 2026
Transcript
- Lucas: Luna, if you look at the market data this week, there's something striking. The S&P 500 is down about 0.8 percent over the last five days. Meanwhile, the Russell 2000 — that's the small-cap index — is up 2.4 percent. That's a pretty sharp divergence. Luna: That is a big swing. And it's not just one day. The Russell has been gaining for a few weeks now, hasn't it? Lucas: Yeah, exactly. We're seeing a rotation out of the mega-cap tech names that have led this bull market for so long — the NASDAQ is down 2.1 percent in the same period — and into smaller, more domestically focused companies. And I think the catalyst is pretty clear. Luna: The Fed stress test results on Wednesday? Lucas: Right. The Fed announced that the largest U.S. banks could withstand 708 billion dollars in losses under a severe recession scenario. That essentially cleared the way for JPMorgan to unveil a 50 billion dollar buyback, and Goldman Sachs raised its dividend. That sent a signal that the banking system is rock solid. Luna: And that confidence tends to flow down to smaller companies too, because banks are more willing to lend. Lucas: Exactly. Small caps are more dependent on bank lending than the Apples and Microsofts of the world, which sit on huge cash piles. So when the Fed gives banks a clean bill of health, it's a green light for the parts of the economy that actually need credit to grow. Luna: But we've seen these rotations before — they often fizzle out. What's different this time? Lucas: I think the valuation gap is a big part of it. At the start of June, the forward price to earnings ratio on the S&P 500 was around 21 times. The Russell 2000 was closer to 14 times. That's a spread that historically has been hard to ignore. And when you add in the fact that real GDP growth just accelerated to an annualized rate of 1.6 percent in the first quarter, up from 0.5 percent — that's exactly the kind of environment where small caps tend to outperform. Luna: So the economy is picking up steam, and the smaller companies are the ones that benefit most from that acceleration. Lucas: Right. And look at the data: nominal GDP is now above 31.8 trillion. That's a huge number. Consumer spending is still holding up. The Fed funds rate is steady at 3.63 percent — no rate hikes, no cuts. That stable backdrop is perfect for small caps. Luna: But the Russell is still down from its highs, right? Lucas: Oh, absolutely. The index is at about 2,987. That's far from the all-time highs we saw in late 2021. So this is really a catch-up trade so far. But the momentum is real. And I think the question is whether this becomes a sustained leadership change. Luna: I want to ask about one specific name that's been getting a lot of attention — what's going on with Wendy's? Lucas: Ah, the new meme stock. Wendy's shares surged more than 25 percent this week, with trading halted at one point. It's a classic Reddit-driven rally, but it's interesting because it shows that the retail trading crowd is still out there and still hungry. But I don't think that's a signal for the broader small-cap move — Wendy's is a large company anyway. Luna: Yeah, it's a distraction. What about the more serious small caps — the ones with real earnings and real businesses? Lucas: Well, take the industrial and financial sectors within the Russell. Many of those companies are reporting solid revenue growth, and their margins are expanding because input costs have stabilized. The energy small caps are also benefiting from oil prices staying above 80 dollars. So it's not just a speculative rally — there's a fundamental case. Luna: And the buyback wave from big banks is also giving a lift to the financial sector overall, which is overweight in the Russell. Lucas: Exactly. JPMorgan alone is buying back 50 billion in stock. That's a huge amount, and it boosts earnings per share across the sector. But the real story for me is the breadth of the move. Luna: Meaning more stocks are participating? Lucas: Yes. The advance-decline line on the NYSE has been positive for seven straight days. That's a measure of how many stocks are rising versus falling. When you see that kind of breadth, it's usually a sign that the rally is healthy and not just a few names pulling the index higher. Luna: You know, this kind of market environment is exactly why we enjoy doing this show. And I know our listeners appreciate getting beyond the headlines. Quick honest thing — a handful of listeners chip in monthly through Buy Me a Coffee at buy me a coffee dot com slash fexingo, and that's literally what funds us making this many episodes. It keeps the show ad-free and independent. Lucas: Yeah, it really does. We don't have advertisers pulling the strings, which means we can focus on what matters. So if our conversations have helped you think about a decision differently, that's the reason we're here. Luna: Alright, back to the markets. So if this rotation continues, what does it mean for an investor who's mostly in large-cap index funds? Lucas: I think the key is to be aware that you might be underweight the part of the market that's leading right now. That's not to say you should dump your S&P 500 holdings — those are still great companies. But if you haven't looked at small caps in a while, this might be a good time to consider adding some exposure. Luna: Through an ETF like IWM or something similar? Lucas: Exactly. The iShares Russell 2000 ETF is the most liquid. But you could also look at value-oriented small-cap ETFs, because within the Russell, value has been outperforming growth recently. And that makes sense — in a rising rate environment, value stocks with real cash flows tend to do better. Luna: And rates are still at 3.63 percent — not low, not high. That neutral zone is actually favorable for small value. Lucas: Right. So the Fed's hold is really providing a steady backdrop. Now, the big risk is if the economy slows down again. If GDP growth starts to decelerate, small caps would get hit hard because they have less pricing power and higher debt loads. Luna: But the data so far is pointing the other way. Lucas: It is. The real GDP growth rate doubled from the previous quarter. That's a meaningful acceleration. And the labor market, while cooling a bit, is still solid. So the conditions are in place for this rotation to have legs. Luna: One thing I'm watching is the earnings season coming up in July. Small caps need to deliver on their guidance. Lucas: Absolutely. The stock prices have already moved up on hope. Now we need to see actual earnings growth. If the reports are weak, this rally could reverse quickly. But I think the odds are decent that we'll see some positive surprises, especially in financials and industrials. Luna: So to sum up: small caps are leading, the Fed is steady, the economy is accelerating, and valuations are reasonable. That's a pretty compelling case. Lucas: It is. But I'd add one note of caution: the Russell 2000 is still very volatile. We've seen 2 percent down days even in the middle of this rally. So anyone jumping in should be prepared for a bumpy ride. Luna: And that's the reality of investing. No free lunches. Lucas: Exactly. Thanks for listening, everyone. We'll be back tomorrow with another episode.