Stocks hit all-time highs as bets the Federal Reserve will soon start cutting rates fueled a rush into riskier corners of the market.
Wall Street extended a pattern of money rotating into small caps and out of the megacap "safety" since last week's soft inflation data.
Over the past four sessions, the Russell 2000 has beaten the Nasdaq 100 by almost 11 percentage points — a feat not seen since 2011.
An equal-weighted version of the S&P 500 — where the likes of Nvidia Corp. carry the same heft as Dollar Tree Inc. — outpaced the U.S. equity benchmark. That index is less sensitive to gains from the biggest companies — providing a glimpse of hope the rally will broaden out.
"Rotation is the name of the game," said Andrew Brenner at NatAlliance Securities. "This is consistent with the increased perception of cutting rates."
Brenner highlighted the fact that around 4 a.m. New York time, Russell 2000 futures soared — while contracts on the Nasdaq 100 slipped. "This means that overseas money, big money, made a very large rotation trade overnight," he said.
To Solita Marcelli, at UBS Global Wealth Management, if the Federal Reserve can cut rates significantly in the context of a soft landing, there will be better prospects for a re-acceleration in earnings growth for lower quality and cyclical segments of the market.
At Interactive Brokers, Jose Torres cited another potential reason for the rally in smaller firms: they tend to be domestically oriented and perceived to benefit "disproportionately" if Donald Trump wins the election.
The S&P 500 topped 5,660, set for its 38th record this year. The Dow Jones Industrial Average climbed almost 2%.
The Russell 2000 gained 3.5%, poised for its biggest five-day run since April 2020. The Nasdaq 100 was little changed. Treasury 10-year yields fell six basis points to 4.17%. Gold hit a record high.
Traders also waded through earnings. Bank of America Corp. rose after saying net interest income would climb by the end of the year.
Morgan Stanley dropped as results from its wealth business fell short of estimates. Charles Schwab Corp. warned it will have to shrink itself in order to protect profits.
The S&P 500 Index is barreling toward its longest stretch without a 2% decline since the onset of the global financial crisis in 2007. The index's current bull run has added $18 trillion in market value since it touched its nadir in October 2022.
The strength of the equity market has been underpinned by optimism the economy has withstood the worst of Fed tightening. In this regard, Tuesday's better-than-estimated retail sales report was a "healthy" development, according to Bret Kenwell at eToro.
It's better to see the Fed cutting rates on falling inflation than to see the central bank rushing to bolster a weakened economy, he noted
While the broadening out in the U.S. stock rally is seen as a positive sign, the surge in small caps in such a short span is showing signs of overheating. In only five days, the Russell 2000 has jumped over 10% — hitting the most-overbought level since December.
