Market Overview & Small Cap Performance - Russell 2000 is the only index negative year-to-date [1] - Small caps have been struggling fundamentally due to an earnings recession [3][4] - Consensus expects a significant growth pickup in the second half of the year, but estimate revisions and guidance need to turn around for confirmation [4] Interest Rate Sensitivity & Fed Policy - Small caps are increasingly sensitive to rate risk, showing a record negative correlation with longer-term treasuries [6][7] - Bank of America economists are not expecting the Fed to cut rates this year, while the market is pricing in several Fed cuts, posing a near-term risk [5] - Higher rates for longer pose a bigger risk for small caps due to high leverage and short-term/floating rate debt [7][8] Potential Positives & Long-Term Outlook - Potential positives for small caps include the US-China deal, growth-positive provisions in the bill, and a slightly more positive ISM [2][3] - Long-term, there is potential for outperformance of small caps given valuations and multi-year themes like reshoring, peak globalization, and a capex cycle in the US [8] - Near-term selectivity is crucial, with better risk-reward in midcaps; focus on areas with better revisions, stronger margins, and avoid levered companies [9][10]