The Russell 2000 (^RUT) saw a multi-day rally this week as investors prepare for what could be a rotation out of Big Tech. Catalysts welcomes on NewEdge Wealth managing director Brian Nick to discuss the movement in small cap stocks and how investors should position their portfolios as Wall Street looks further to the second half of the year.
“We see our clients don’t own enough small cap according to sort of where our advice would tend to fall. So these things can be very powerful. I think the last two days, it seems like you’ve seen a bit of a rethink. Maybe people are exhaling, taking a breath, interest rates going back up. That’s not going to help small-cap,” Nick explains.
As the Russell 2000 index starts leveling out from the last week of gains, he adds: “The next move is just as likely to be back to underweight as it is to overweight, because we’re a bit more cautious on growth as we go forward.” Nick believes the 2025 earnings expectations in small caps are “extremely demanding,” and in order to meet them, there needs to be strong fundamentals and better growth data.
“The strategy that we’re employing is we’re not adding Russell 2000 exposure. We’re adding S&P 600 (^SP600) exposure. It’s a little bit of a different benchmark. It’s narrower. You need to be more profitable… It’s also going to tend to emphasize higher quality earnings,” Nick states.
NewEdge Wealth is “just as likely to recommend longer duration, higher quality bonds” in the case of the Federal Reserve anticipating a soft landing scenario.
“What we’re most concerned about, though, is the slowdown where bonds will do relatively well and stocks will do less well. And that’s the one that’s the hardest to prepare clients for because so many investors are overweight stocks. Just the inertia of the last, whatever time horizon you’re talking about, one year, five years, ten years, a lot of people are overweight stocks in their portfolio because we haven’t really seen that prolonged, persistent downside scenario where interest rates are falling, but stocks are also falling.”
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