Wall Street Expects Rally in Riskiest Stocks to Last 12 Months

Core Viewpoint - The Russell 2000 Index, representing small-cap stocks, has experienced a significant rally, with strategists suggesting that this upward trend is just beginning [1][2]. Performance Summary - The Russell 2000 has surged nearly 10% since the end of July, outperforming the S&P 500, which has seen only half that advance [2]. - Analysts predict a potential 20% increase in the Russell 2000 over the next year, compared to an 11% forecast for the S&P 500 [2]. Historical Context - Small-cap stocks have underperformed larger companies since 2020, and despite recent gains, they still lag behind the S&P 500 in 2025 [3]. - The anticipated Federal Reserve rate cuts are expected to lower borrowing costs for Russell 2000 companies, potentially enhancing profit margins [3]. Market Sentiment - The recent market reaction to inflation and employment data has fueled optimism, with the Russell 2000 rising 1.2% in response to favorable economic indicators [4]. - Michael Casper from Bloomberg Intelligence notes that small-cap companies are particularly sensitive to the U.S. economy, and rate cuts could lead to increased support from investors [4]. Analyst Insights - Morgan Stanley's Michael Wilson suggests that Fed rate cuts could initiate a new phase in the bull market, positively impacting small-cap stocks [5]. - Wilson has upgraded small caps to neutral but is awaiting broader earnings revisions before fully committing [5]. Earnings Performance - In the current reporting season, over 60% of Russell 2000 stocks have exceeded earnings estimates, with results beating top-line expectations by an average of 130 basis points [6].