The S&P 500 briefly traded in record territory yesterday before closing just below an all-time peak. Small-cap stocks, however, had no trouble setting new highs.
The Russell 2000, a widely followed small-cap benchmark, pushed further into record territory on Tuesday, August 21. The S&P 600, another popular small-cap index, also set a new all-time high.
Comparing small caps against the broad market via the S&P 500 (SPX) this year reveals that the lower end of the equities spectrum continues to lead by a wide margin. The Russell 2000 (RUT) is up 11.9% year to date, a hefty premium over the S&P 500’s 7.1% gain so far this year. The S&P 600 (SML) is up even more, posting a sizzling 16.9% year-to-date performance.
Will the rally continue? Positive momentum suggests there’s still room to run. All three indexes are above their respective 50- and 200-day moving averages and the 50-day averages are well above their 200-day counterparts.
There’s also a healthy tailwind blowing with earnings, advises Richard Turnill, BlackRock’s global chief investment strategist. “Firms beating expectations have been rewarded with rising stock prices, even as investors fret about rising economic uncertainty, trade frictions and a strong U.S. dollar,” he noted recently. “Our analysis of corporate guidance suggests company confidence is on the rise — giving us conviction that earnings strength can power on in 2018 amid solid global growth.”
Analysts say that small caps are drawing strength from a tax cut that’s juiced US economic growth this year. GDP growth accelerated to 4.1% in the second quarter, nearly double Q1’s pace. The outlook for Q3 is upbeat, too. The Atlanta Fed’s nowcasting model is especially bullish, projecting that output will tick even higher to 4.3% in the current quarter (as of the August 16 estimate). Now-casting.com’s August 17 outlook called for a softer 3.3% rise, but that’s still a solid gain.
