Small caps rally as Magnificent 7 stocks roll over in market rotation

Group 1: Market Trends - Small-cap stocks, represented by the Russell 2000, gained over 1% in midday trading, contrasting with the S&P 500, which remained relatively unchanged due to major technology stocks [2][4] - The Russell 2000 has increased more than 4% this week, indicating it is on track for its best week since May [3] - The CNBC Magnificent 7 Index, tracking seven megacap technology companies, lost 0.3% after reaching a 52-week high earlier in the day [1] Group 2: Federal Reserve Expectations - Investors are increasingly confident that the Federal Reserve will cut interest rates at its upcoming meeting on September 16-17, which would particularly benefit small companies reliant on borrowed capital [4][5] - Interest rate futures traders are pricing in a nearly 100% likelihood of a rate cut from the current 4.35% to a range of 4.50% at the September meeting, a significant increase from less than 60% a month ago [5] - A growing number of economic and political voices are advocating for rate cuts, especially following weaker-than-expected job growth and a cooler-than-expected consumer inflation report [6] Group 3: Political Influence - President Trump and his allies have criticized Fed Chair Jerome Powell's rate policy, urging the Federal Open Market Committee to ease monetary policy [8] - Treasury Secretary Scott Bessent suggested that the Fed should lower rates by at least 1.5 percentage points, proposing a 50 basis point cut in September [9] Group 4: Performance Comparison - Despite recent gains, small caps have underperformed compared to larger stocks, with the Russell 2000 advancing less than 26% since the introduction of the ChatGPT app in late 2022, while the S&P 500 has climbed 64% during the same period [10]