Small Caps Flourish as US Earnings Growth Broadens Beyond Tech

Core Insights - Smaller US companies are experiencing a strong earnings season, with 65% of Russell 2000 constituents exceeding fourth-quarter profit expectations, the highest rate since mid-2021, while the S&P 500 firms have the lowest beat rate in three quarters [1] - The trend indicates a market rotation away from technology-heavy stocks, with small caps showing the best earnings revisions breadth since August, suggesting a return of positive operating leverage [2][5] - The Russell 2000 index is outperforming the S&P 500 by over 6 percentage points this year, on track for its strongest outperformance in a decade, as the Federal Reserve cuts rates and the US avoids a recession [6] Company Performance - Solid earnings results from small-cap companies have led to significant stock price increases, such as Viavi Solutions Inc. which surged 18% after better-than-expected earnings [8] - Russell 2000 companies are experiencing a higher rate of earnings revisions compared to large-cap firms, indicating a shift in dominance from the S&P 500 [9] Market Sentiment - Investors are becoming increasingly cautious about substantial investments in artificial intelligence, contributing to volatility in tech-heavy indices like the Nasdaq 100 [6] - The market is diversifying beyond a few large tech companies, with a broader focus on stocks across various sectors driven by economic performance [7]