The Russell 2000 index of small caps, tracked by the iShares Russell 2000 ETF IWM, recorded its best weekly performance since October 2023, surging over 6% and reaching its highest level since January 2022.

The rally was largely driven by Thursday’s session, where the Russell 2000 posted a remarkable 3.6% daily gain. This spike followed lower-than-expected June inflation data, which fueled speculation of potential interest rate cuts.

However, Quincy Krosby, chief global strategist for LPL Financial, advises caution, suggesting that Russell 2000’s rate cut message may be “clouded by Fed’s concerns over labor market.”

Krosby thinks a weaker labor market would still hurt the economically sensitive Russell 2000 index, and rate cuts may not necessarily shield it from a broader economic slowdown.

Chart of The Week: Small Caps Achieved Best-Performing Week In Over 8 Months

Image: Benzinga Pro

The Russell 2000’s impressive performance highlights a significant shift in market focus, with interest rate-sensitive small and mid-cap stocks benefiting as investors move away from mega-tech names and direct inflows into the broader market, Krosby highlighted.

The analyst indicated the Russell 2000 serves as a critical indicator for potential interest rate easing and broader economic conditions. Typically, the small- and mid-cap universe will sell off at any hint of a significant economic slowdown, despite their attractive valuations.

“Historically, the Russell 2000 lags the market for three months following the first rate cut as the Fed normally cuts rates due to concerns about the economy and specifically the labor market. Fed Chair Powell has made it clear, as he continues to invoke the Fed's maximum employment mandate, that the Fed would cut rates at a faster pace to help support the economy,” she said.

If labor market conditions deteriorate, the Fed might initiate an easing cycle sooner than the scheduled Sept. 18 meeting, Krosby stated. The market prefers a rate cut driven by inflation easing within a robust economic backdrop.

This Week’s Top Performers In The Russell 2000

1. Morphic Holding, Inc. MORF: 75.16% (Health Care)
2. Lantheus Holdings, Inc. LNTH: 55.47% (Health Care)
3. IGM Biosciences, Inc. IGMS: 54.22% (Health Care)
4. SoundHound AI, Inc. SOUN: 52.63% (Information Technology)
5. Methode Electronics, Inc. MEI: 47.96% (Information Technology)
6. Solaris Oilfield Infrastructure, Inc. SOI: 46.87% (Energy)
7. Pulse Biosciences, Inc. PLSE: 45.98% (Health Care)
8. Ouster, Inc. OUST: 44.21% (Information Technology)
9. EVgo, Inc. EVGO: 42.65% (Consumer Discretionary)
10. Sunrun Inc. RUN: 42.51% (Industrials)

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