State Street: Small-Cap Rally Is 'Not a Junk Rally'
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- Matt Bartolini, State Street's global head of research strategists, declared the small-cap rally 'not a junk rally,' pointing to a net-positive flow of Wall Street earnings upgrades and projected EPS growth of over 20% this quarter.
- All 11 small-cap GICS sectors are simultaneously outperforming their respective large-cap sectors — a pattern not seen in over 30 years, which Bartolini cited as evidence of 'depth and breadth.'
- Less-heavily-shorted small-caps are beating heavily-shorted names — the inverse of what a short-squeeze 'junk rally' would show, Bartolini said, framing it as a signpost of a sustainable rally.
- The Russell 2000 is up close to 20% in the first half — its best start since 1991, when George H.W. Bush was president — while State Street's SPSM and SLYG ETFs tracking S&P 600 small-cap indexes have each gained more than 20% year-to-date.
- Phil McInnis of Avantis Investors said small caps remain 'overlooked' by investors anchored in S&P 500 funds, which he argued give 'nowhere close to the full stock market' exposure.
- McInnis also flagged emerging markets, non-U.S. developed markets, and mid-caps as underweighted opportunities, noting the IEMG emerging-markets ETF has climbed more than 18% year-to-date.
Why it matters: With every small-cap GICS sector outperforming its large-cap counterpart for the first time in 30 years and analyst upgrades outpacing downgrades, the Russell 2000's nearly 20% first-half surge looks fundamentally driven rather than a short-covering snapback. Investors still concentrated in S&P 500 funds may be missing the broadest U.S. equity rotation in three decades — plus other overlooked corners like emerging markets and mid-caps.
