Latest / Bull Market Conversations with Fexingo: Rallies, Momentum, and Riding Market Strength / How the Russell 2000 Is Beating the S&P 500 in June 2026
Transcript
- Lucas: So the S&P 500 just had its worst week in a month, down one point four percent. But the Russell 2000, the small cap index, gained one point four percent. That's a nearly three hundred basis point spread in a single week. Luna: That is not something you see very often. What's driving it? Lucas: A few things. First, rates. The fed funds rate is at three point six two percent and it's been flat for months. Smaller companies are more rate-sensitive because they tend to have floating-rate debt. So when the Fed holds steady and the market stops expecting cuts, the uncertainty actually subsides. That's a relief for small caps. Luna: Right, because they can finally plan around a stable cost of capital. Lucas: Exactly. And the second factor is revenue exposure. The Russell 2000 generates about eighty percent of its revenue domestically. Large caps in the S&P 500 get maybe half their revenue from abroad. So when you have tariff headlines and a strong dollar—which we've had this year—smaller companies feel less of a hit. Luna: If today was actually useful so far, the way these conversations stay ad-free and independent is listener support. Just buy me a coffee dot com slash fexingo helps us keep going without any sponsors breathing down our neck. Lucas: Honestly, we love making this show and hearing that it helps people think about their decisions differently. So if you value that, that link is the easiest way to keep it rolling. Now back to that rotation—you've got the growth indexes, i w f and V-U-G, down two and a half and two point eight percent respectively this week. That's a massive divergence from the Russell. Luna: Growth stocks getting crushed while small caps rally. That feels like a classic rotation trade. Lucas: It does. And it's not just a one-week fluke. Look at the five-day performance on the data we're seeing—Cloudflare dropped ten point six percent, Palantir fell four point eight percent, Shopify down two point seven. Meanwhile, CrowdStrike, which is a large cap cybersecurity name, actually went up one point nine percent. So even within growth, there's dispersion. Luna: What about the equal-weight S&P 500? I imagine that tells a different story than the cap-weighted index. Lucas: Great question. The cap-weighted S&P 500 is down one point four percent. But the equal-weight version, which gives each company the same allocation, likely held up better because it underweights the megacap tech stocks that have been dragging the index down. Unfortunately, I don't have that exact number in front of me, but historically, when the Russell outperforms, the equal-weight S&P does too. Luna: So what's the macro catalyst? The Fed held steady at three point six three percent. GDP growth came in at one point six percent annualized for Q1, up from zero point five. That's not booming, but it's stable. Lucas: Stability is actually the key. Small caps hate volatility more than they hate slow growth. If the economy is growing modestly and rates are predictable, small companies can plan inventory, hiring, capital expenditures. That's a Goldilocks environment for them. Luna: And the growth stocks were priced for perfection. So when the macro doesn't accelerate, they get repriced. Lucas: Right. The i w f ETF, which tracks large cap growth, is down two and a half percent this week. That's a bigger drop than the S&P 500. The market is saying: we overpaid for future growth expectations, let's rotate into something with lower valuations and more tangible domestic earnings. Luna: Is there a risk this rotation reverses if the Fed does cut later this year? Because growth stocks typically love lower rates. Lucas: That's the big debate. If the Fed cuts because inflation is truly tamed, growth stocks could rally again. But if they cut because the economy is weakening, then small caps might actually benefit even more because they're more cyclical. I think the market is currently pricing in a soft landing, which favors the Russell. Luna: And what about the NYSE Composite? That was down only zero point three percent, so it seems like the broadest index is barely moving. Lucas: That's a great observation. The NYSE Composite includes a lot of financials, industrials, and utilities—value sectors. So the pain is concentrated in the NASDAQ, which fell one point seven percent. The Dow fell one point three percent. So the real story is tech-heavy growth getting hit while the rest of the market holds up. Luna: So for an investor listening, what's the takeaway? Should they be adding small caps here? Lucas: I think it depends on time horizon. If you believe the economy stays at this one point six percent growth pace and rates stay near three point six, small caps look attractive. They trade at a discount to large caps historically. The Russell's price to earnings ratio is around fifteen times forward earnings, versus the S&P 500 at about twenty-one. That's a thirty percent discount. Luna: That's a pretty big gap. Lucas: It is. But you have to be selective. Not all small caps are created equal. The Russell 2000 has a lot of unprofitable companies. If you look at the S&P SmallCap 600, which requires profitability, that index has performed even better this week. So quality matters. Luna: And what's your gut feeling on the longevity of this rotation? Is it a few weeks or a few months? Lucas: I think it has legs through the summer, at least. The market is repricing growth stocks after a huge run, and small caps are playing catch-up. But the Fed meeting in July could change the narrative if they signal something different. For now, the data supports small caps. Luna: So watch the Fed, watch GDP, and watch the Russell's relative performance. Lucas: Exactly. And don't ignore the equal-weight S&P 500 as a proxy. If that starts outperforming the cap-weighted index, it confirms the rotation is broadening. Luna: Alright, that's a solid framework. Let's see if the Russell can hold these gains next week. Lucas: Absolutely. We'll keep tracking it.