Look now, because small-cap stocks and relevant ETFs are having their long-awaited moments. Following a one-month gain of more than 6%, the Russell 2000 Index is higher by nearly 9.30% for the 90 days ending July 1. The Invesco NASDAQ Future Gen 200 ETF (QQQS ) has done even better.
QQQS, which follows the Nasdaq Innovators Completion Cap Index, soared 12.51% over the month ending July 1. And the ETF could have more room to run. That’s because it entered the July 2 trading session almost 12% below the 52-week high. That’s an encouraging technical sign, but there’s more to the QQQS. That includes easing of some of the issues that plagued small-caps in the first quarter and into April.
Those concerns namely about volatile U.S. trade policy — the primary headwind for stocks of all cap sizes earlier this year — are easing. In theory, that should’ve been less of an issue for domestically focused small-caps and ETFs such as QQQS. But the reality was different. Now, market participants view the trade outlook as more sanguine. That’s paving the way for big gains by smaller stocks.
QQQS Could Be Second-Half Winner
It’s possible that trade levies will reemerge as a drag on risk assets. But some experts see consensus macroeconomic outlook for the second half as conducive to small-cap gains.
“Markets still face plenty of uncertainty, largely hinged around trade policy, but some of the worst-case outcomes now look more unlikely. Investors may be more inclined to look past this issue if the trade negotiations continue to progress,” noted Vincent Nichols of BNP Paribas. “US stock markets could draw further support from the probability of tax cuts, partly funded by revenues from the import tariffs.”
Another form of help for small-caps could arrive in the form of rate cut by the Federal Reserve. That assist that could arrive as soon as this month. And that could prove beneficial to QQQS because the ETF heavily weights to cash-hungry healthcare companies.
“In the case of a more pronounced slowdown or recession, we believe the US Federal Reserve has ample room to soften its monetary stance given that the fed funds policy rate is still in restrictive territory at well above 4%,” added Nichols.
Adding to the case for QQQS is easing inflation. That could compel the Fed to be more accommodative, supportive White House policy, and the possibility of earnings growth recovery.
“The small and medium-sized company sector is more diversified than large caps and its share performance is more highly correlated with cyclical momentum. Small-cap net income is down by more than a third from its peak in 2022, so we believe there is ample opportunity for a pronounced recovery in earnings growth from these low levels,” concluded Nichols.
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