The Russell 2000 (^RUT) saw a multi-day rally this week as investors prepare for what could be a rotation out of Big Tech. Catalysts welcomes on NewEdge Wealth managing director Brian Nick to discuss the movement in small cap equities and how investors should position their portfolios as Wall Street looks further to the second half of the year.
“We see our customers don’t own enough small cap according to sort of where our advice would tend to fall. So these things can be very powerful. I think the last two days, it seems like you’ve seen a bit of a rethink. Maybe people are exhaling, taking a breath, borrowing charge rates going back up. That’s not going to help small-cap,” Nick explains.
As the Russell 2000 index starts leveling out from the last week of gains, he adds: “The next move is just as likely to be back to underweight as it is to overweight, because we’re a bit more cautious on development as we go forward.” Nick believes the 2025 earnings expectations in small caps are “extremely demanding,” and in order to meet them, there needs to be strong fundamentals and better development data.
“The plan that we’re employing is we’re not adding Russell 2000 exposure. We’re adding S&P 600 (^SP600) exposure. It’s a little bit of a different benchmark. It’s narrower. You need to be more profitable… It’s also going to tend to emphasize higher quality earnings,” Nick states.
NewEdge Wealth is “just as likely to recommend longer duration, higher quality securities” in the case of the Federal Reserve anticipating a soft landing scenario.
“What we’re most concerned about, though, is the slowdown where securities will do relatively well and equities will do less well. And that’s the one that’s the hardest to prepare customers for because so many investors are overweight equities. Just the inertia of the last, whatever time horizon you’re talking about, one year, five years, ten years, a lot of people are overweight equities in their investment mix because we haven’t really seen that prolonged, persistent downside scenario where borrowing charge rates are falling, but equities are also falling.”
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