Stocks closed higher on Tuesday as the S&P 500 set its 38th record high close of the year, gaining 0.64%. The Nasdaq Composite also added 0.2%, but the standout performers were the Dow Jones Industrial Average and the Russell 2000. The Dow recorded its largest one-day move since June 2023, gaining 1.85% and setting a new record high. Small-cap stocks, as represented by the Russell 2000, have been on a five-day winning streak, outperforming both the Nasdaq and S&P 500 over this period.
The Russell 2000 has outperformed the Nasdaq by 11% during its recent winning streak, marking the largest outperformance since December 2020. It has also outperformed the S&P 500 by 10%, the widest outperformance on record dating back to 1986. This shift in market leadership from larger tech companies to small caps is seen as crucial for the overall market to continue heading higher. The broadening participation in the market is happening at a time when there are expectations of a potential interest rate cut by the Federal Reserve and optimism surrounding earnings for the second quarter.
There is a growing possibility of an interest rate cut in September according to the CME Fed Watch Tool, with a 100% probability being currently indicated. Additionally, there is almost a 65% chance of a second rate cut in November. Earnings expectations for the S&P 500 in the second quarter are forecasted to increase by 9.3%, further adding to the positive sentiment in the market. Companies like Johnson and Johnson have already announced positive earnings results, leading to optimism for a strong earnings season overall.
A goldilocks scenario seems to be unfolding in the market, with strong earnings growth, cooling economic data allowing for potential interest rate cuts, and a broader participation of stocks driving indices higher. While pullbacks are always possible, the overall picture remains healthy. Small cap stocks are being closely monitored after their recent winning streak, and a potential profit-taking scenario is being anticipated. Maintaining a focus on long-term objectives and investing plans is advised in the current market climate.
In conclusion, the recent market performance has been characterized by record highs, particularly in small cap stocks like the Russell 2000. This shift in market leadership away from tech giants to smaller companies is seen as a positive development for the overall market. With expectations of a potential interest rate cut by the Federal Reserve and optimism surrounding earnings, the market is poised for continued growth. By staying focused on long-term objectives and maintaining investing plans, investors can navigate the current market conditions with confidence.
