Citi Strategist Says Small Cap Stocks Are Promising

After a challenging two years, small cap stocks are showing signs of recovery, according to Scott Chronert, head of U.S. equity strategy at Citi Research. The Russell 2000 index has risen 4.3% this week and boasts a 9.4% increase for July, as investors shift their focus from mega-cap technology stocks to the more rate-sensitive small cap sector. This shift is driven by growing optimism regarding potential interest rate cuts from the Federal Reserve. Chronert highlighted that the current market conditions resemble a "Goldilocks scenario," where easing monetary policy and a potential soft landing for the economy could sustain the small cap rally. He emphasized that the Russell 2000, while less involved in the AI growth trend, has significant exposure to the banking sector, which he views as a strong investment opportunity. He described banks as "the cleanest Trump trade right now," noting their favorable valuation metrics. The anticipated Federal Reserve pivot, along with a bearish steepening yield curve, is expected to enhance the fundamentals of the small cap sector. Chronert pointed out that this sector has minimal exposure to tariffs, a key issue in the political landscape, further bolstering its attractiveness. He also mentioned the potential benefits of deregulatory measures for banks, positioning them favorably in the current economic climate. Looking ahead, Chronert forecasts the S&P 500 will end the year at 5,600, aligning closely with its current trading levels, as the market navigates these evolving dynamics.