These flagship stocks sent a larger market signal of underlying economic strength

wall street bull


  • Recent gains in small-cap stocks are a sign of a broader rally, wrote Quincy Krosby of LPL Financial.

  • It also points to a stronger economy, as the Russell 2000 Index is considered riskier than the S&P 500.

  • “The continued interest in small caps suggests the economy is more resilient than the headlines suggest.”

Recent momentum in small-cap stocks could point to a broader market recovery and a stronger economy, according to Quincy Krosby, chief global strategist at LPL Financial.

Citing gains from the Russell 2000 Index, the analyst pointed to signs of improving market breadth, followed by indications of greater participation from institutional investors.

The Russell 2000 jumped nearly 10% from a May low, led by banks and industrials. In previous months, the Russell’s rises were temporary, Krosby told Insider, making headlines as news of a bank sale.

Indeed, small caps had been overtaken earlier this year following regional bank failures in March, causing a loss of confidence in the lending industry.

“Given that the Russell 2000 is heavily populated by banks, seeing the index’s gain support suggests that we are finally getting past the fear that another bank-linked stock will drag financial markets down,” he said. she wrote in a note on Wednesday.

“Furthermore, small caps have traditionally served as a benchmark in terms of the broader economic landscape. With all the ongoing debate about the state of the economy and concerns about an impending recession, the continued suggests that the economy is more resilient than the headlines suggest, or that a recession could be milder than initially expected.”

To be sure, the S&P 500 also showed signs of increased participation, with more inflows into large-cap consumer discretionary stocks adding to the notion of broadening market support, Krosby added.

And now a new bull market has arrived on Wall Street after the S&P 500 rebounded 20% from its October low.

Previously, the S&P 500 relied heavily on a handful of mega-cap stocks as investors poured money into AI-related tech stocks.

“Their rock-solid balance sheets and a strong earnings record have become the primary reason for their outsized performance during times of uncertainty, to the defiance of a legion of seasoned fund managers and analysts,” Krosby wrote. “Granted, the ‘AI’ factor only added to their appeal.”

Market veteran Ed Yardeni warned that mega-cap stocks could see the “mother of all mergers” followed by a major downturn.

Meanwhile, the Russell 2000 entered overbought territory as it plunged on Friday, Krosby told Insider, with further weakening possible if the Federal Reserve raises interest rates at its next meeting.

“But the movements we saw were significant,” she added. “They weren’t unique.”

Read the original article on Business Insider

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