Latest / Bull Market Conversations with Fexingo: Rallies, Momentum, and Riding Market Strength / Why the Bull Market Is Ignoring Small Caps
Transcript
- Lucas: So here we are, July 17, 2026. The S&P 500 is at 7,534. The Nasdaq is above 25,800. And the Russell 2000? 2,975. That's basically flat on the week, down on the month, and barely up on the year. Luna: It's the same story we keep hearing — big tech ripping, everything else sitting still. But is that actually still true? Or are we missing a shift? Lucas: Good question, because the numbers don't lie. The Russell is roughly where it was in early May. Meanwhile, the S&P 500 added about 200 points since then. The spread between large-cap growth — think the IWF ETF — and small caps is now the widest it's been since the tech bubble. Luna: That's a staggering statistic. And we're not even talking about ARKK, which is down 4.5 percent in just five days. High-beta innovation is getting crushed. Lucas: Right. So the question is: why? The economy is growing — real GDP came in at 2.1 percent annualized in the first quarter, up from near zero. The Fed is on hold. You'd think smaller, more domestic companies would benefit. Luna: But the market clearly thinks otherwise. Is it rates? Because Dallas Fed President Logan just said she sees a case for 'modestly' higher rates. Lucas: That's part of it. The effective fed funds rate is 3.63 percent. That's not crisis-level, but small companies carry a lot more floating-rate debt. They didn't lock in low coupons during 2021 like Apple or Microsoft did. Every quarter, their interest expense creeps up. Luna: So higher for longer is a slow bleed for them. Meanwhile, large-cap tech companies are sitting on piles of cash and generating huge free cash flow. Lucas: Exactly. And that's showing up in earnings. The small-cap index's earnings per share this year is actually below where it was in 2022. So you have a valuation that looks cheap on a price to earnings basis, but only because earnings have fallen more than prices. Luna: Which means the so-called 'value' in small caps might be a value trap. Unless something changes. Lucas: And that's where it gets interesting. Because there are pockets of small caps that are doing just fine. Take cybersecurity. CrowdStrike is up almost 9 percent in the last five days. It's not technically a small cap anymore — market cap around 80 billion — but it started there. Luna: What's driving that? Earnings? Or just sector rotation? Lucas: A bit of both. Cybersecurity spending is non-discretionary at this point. Every data breach pushes budgets higher. And CrowdStrike specifically has been winning share. Their endpoint protection platform is sticky, and they're cross-selling cloud security. Luna: So the market is rewarding companies with real earnings growth, even in small caps. It's just that most small caps don't have that. Lucas: Right. And that's actually the healthy version of a bull market. It's not broad, mindless buying. It's discriminating. The S&P 500's gains this year are heavily concentrated in maybe 20 stocks. The rest are treading water. Luna: But that concentration is itself a risk. If those 20 stocks stumble, there's nothing underneath to catch the market. Lucas: Exactly. And that's the debate right now. Do you rotate into small caps as a contrarian bet, hoping for a catch-up trade? Or do you accept that the market is telling you something structural about the economy? Luna: I think the structural argument has more weight. Small caps are more exposed to the consumer, and consumer health is starting to show cracks. Credit card delinquencies are up, savings are down. Lucas: And the small-cap index has a lot of retail, regional banks, and industrial suppliers — all of which are feeling margin pressure from wage inflation and higher input costs. So the bull case for small caps really depends on the Fed cutting rates aggressively. Luna: Which Logan just pushed back on. So the market's message seems consistent: stay large, stay quality, stay growth. Lucas: But here's the thing — if you're a long-term investor, this is exactly the kind of dispersion that creates opportunity. When everything is correlated, you can't find bargains. When small caps are out of favor, you can start building positions in companies with strong balance sheets and growing earnings that happen to be small. Luna: You need to be selective. Not just buy the Russell ETF and hope. Lucas: Absolutely. And that's where active management can actually add value. We're seeing some of the best small-cap fund managers outperform by a wide margin this year, because they're not just buying the index. Luna: It's a stock-picker's market, even if the headline says otherwise. Lucas: And you know, that kind of thoughtful, long-term conversation is exactly why we do this show ad-free. We don't run commercials, we don't take sponsored segments. It's just two people trying to make sense of the market without any of that noise. Luna: Yeah, and if that's valuable to you, there's a simple way to support it. Buy me a coffee dot com slash fexingo. That's it. No subscription, no perks, just knowing you're keeping this independent. Lucas: So back to small caps. One area where we are seeing genuine earnings momentum is in cybersecurity. CrowdStrike, as we mentioned, but also some smaller names like SentinelOne and Zscaler. They're all benefiting from the same secular tailwind. Luna: And they're not cheap. But in a bull market that's rewarding growth, they're getting premium multiples. Lucas: Right. And that's the tension. You can buy a cheap small-cap retailer with a single-digit P/E and watch it get cheaper, or you can pay up for a cybersecurity company growing 30 percent and get rewarded. The market is voting with its dollars. Luna: So are we in a small-cap bear market or just a rotation? Lucas: I'd say it's a bear market for small-cap companies without pricing power or a growth story. And a bull market for the ones that have both. The Russell 2000 is an average, but the dispersion underneath is enormous. Luna: Which means the index itself might be misleading. The average small-cap stock is struggling, but the top decile is thriving. Lucas: Exactly. And that's a useful lens for anyone managing a portfolio right now. Don't just buy small caps because they're 'cheap'. Buy the ones that are actually growing earnings and have a moat. Luna: So what's your takeaway for listeners? What should they do with this? Lucas: I'd say look at your small-cap exposure. If you own a broad ETF, understand that you're holding a lot of companies that are struggling. If you want to be tactical, you can pair that with individual names in cybersecurity, healthcare innovation, or niche industrials where earnings are actually accelerating. Luna: But don't try to time a rotation. It might not come until the Fed signals a cut. Lucas: Right. And given Logan's comments yesterday, that signal isn't coming soon. So patience, selectivity, and a long timeframe. The bull market is still intact — it's just not in small caps. Luna: Unless you pick the right ones. And that's the challenge. Lucas: Always has been. Thanks for listening.