Dow leads stocks higher as fresh gains roll in

The small-cap Russell 2000 index (^RUT) rose more than 1.5% on Wednesday, far outpacing the gains of the three major indexes and approaching its 52-week high of 2,300.

If the Russell closes at its current level, it will mark the index’s highest close since November 2021.

Small caps are among the most controversial trades on Wall Street in 2024. Given the sector’s higher refinancing risk, strategists argue that lower interest rates will benefit the group. According to Wall Street strategists, this thesis, coupled with evidence that the US economy remains headed for solid growth, once again argues for an allocation to small caps.

Mike Wilson, Morgan Stanley’s chief investment officer, recently switched to a “neutral” allocation between small and large caps after the Federal Reserve cut interest rates by half a percentage point in September.

“For us to be fully bullish on small caps overall, early macro indicators would likely need to show that a significant acceleration in growth is imminent,” Wilson wrote in a note to clients on Tuesday. “Right now we are focused on idiosyncratic opportunities in the small-cap space.”

He added: “Valuation is relatively cheap for small caps while earnings are expected to improve. In some ways, this has been the mantra of the small-cap index for nearly two years, but after consecutive years of earnings declines, the consensus is more optimistic. “Earnings expansion is imminent.”