Small Caps Are 'Outperforming Everything,' Analyst Says: This Rally's Been 'Years In The Making'

Small-cap stocks will continue to outperform the larger caps as we move through 2024.

That’s according to Craig Johnson, managing director and chief market technician at Piper Sandler, who was interviewed on Tuesday on Benzinga’s PreMarket Prep show.

“Small caps are currently outperforming everything — the Mag7 and the large caps — since the end of November,” said Johnson.

The “Mag7,” short for the so-called “Magnificent Seven," is a nickname for big-name stocks like Apple Inc., Amazon.com, Inc., Alphabet Inc., Meta Platforms, Inc., Microsoft Corp., NVIDIA Corp., and Tesla, Inc.

The Russell 2000 index jumped more than 6% in just two days following last week’s Federal Reserve meeting. Investors have welcomed the likelihood of interest rate cuts in the first half of 2024.

The index, which is tracked by the iShares Russell 2000 ETF IWM, has traded within a band, and meeting upside resistance at the 2,020 level for 20 months. It currently sits at 2,016.

Small caps have been particularly sensitive to high-interest rates. Smaller, indebted companies find it tougher to service these debts, incurring greater costs that weigh on profits.

But, with the Federal Reserve now preparing the ground for rate cuts next year, Johnson expects the Russell index to take off.

“Once you get through the area of resistance around the 2,020 level it’s going to very quickly get up to 2,132 and then probably back up to 2,192 — when that happens all these small caps will continue pushing higher. It’s been years in the making,” Johnson said.

Also Read: US Small Caps Streak Ahead: Interest Rate Euphoria Gives America’s Small Businesses A Boost

What Could Throw A Wrench Into This Model?

Much will depend on the Fed and its action on easing interest rates. Johnson thinks the Fed funds rate will probably fall to around 3.25%-3.3% over time. It took the Russell 2000 seven years from the peak to the reversal to the retest in the 1980s, he says. Something similar may happen again.

“We’re going to have some great trading coming up as we process our way through this,” he said, but there are some potential problems along the way.

Next year sees a particularly contentious U.S. presidential election, so there’s political risk. Geopolitical risk is also never far away, should things escalate in the Middle East or in Ukraine.

What Of The Larger Cap Stocks?

Among the bigger names on the senior index, Johnson believes the market is going to become range-bound for much of the year.

“We think 2024 is going to be a HLTR — a high-level trading rage,” he said. “This is a market that is going to grind up to those old highs in the next eight to nine trading days.

“We’re going to get there, then probably end up in a period of consolidation,” he added. “And we’ll be in this high-level trading range for much of 2024 — an equity stall near the 2022 highs, where your Mag7s become your Lag7s.”

Now Read: Goldilocks 2024: Investors Increasingly Optimistic On Profits Outlook For Next Year

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