One day of market action doesn’t make a new trend. But recent price action this week, mixed as it’s been, has started to fuel a resurgence in optimism over U.S. risk assets. Specifically, it seems to have rekindled our interest in small-cap stocks.
To quote Peter Tuchman, the veteran NYSE trader also known as the Einstein of Wall Street, “deals are starting to happen and that’s what we’ve been waiting for,” he said on X.com earlier this week, highlighting U.S./China and U.S./Saudi Arabia trade-related news.
Will Momentum Push Market Up?
Looking back to recent April lows, he said, first came a “technical” rebound in U.S. stocks. Then, “hope” that policy turmoil would lead to deals fueled another leg higher. Now, as we live through what he calls “pivotal days," maybe “momentum” will come next to keep pushing the market up. Whatever framework you use to explain recent market action, there’s no ignoring the fact that the S&P 500 is up almost 22% from its April 7 low (as of Wednesday’s close.)
In this environment where data hasn’t exactly confirmed a significant economic slowdown, something Federal Reserve Chairman Jerome Powell recently reiterated is the case: Appetite for risk is evolving. One area that has recently been finding new traction is U.S. small-caps. That demand is coming possibly at the expense of some earlier-year enthusiasm over developed international equities.
For example, State Street Global Advisors shared this week its latest update to its lineup of six Active Asset Allocation ETF Models. These multi-asset models are built around risk tolerance, and range from what the firm labels “conservative” to “maximum growth.”
All Tactical Models Had Allocations Tweaked in Latest Rebalance
All of the tactical models, which are rebalanced anywhere from 12 to 20 times a year, have seen tweaks in allocation in the latest rebalance. A look at the most risk-on model as an example of demand trends, the “Maximum Growth” portfolio, shows an interesting pivot in risk asset positioning. The model recently adjusted its equity allocation in two interesting ways.
First, State Street decreased the model’s exposure to both international developed equity and to European equities, specifically. The portfolio’s position in the SPDR World ex-US ETF (SPDW ) was cut by 4%, down to a 15% weighting. The allocation to SPDR Europe ETF (SPEU ), originally at 2%, is now zero. An Europe-only position is now out.
On the flip side, the model now has a little more exposure to emerging markets. The SPDR Emerging Markets ETF (SPEM ) now represents 15.5% of the overall mix, up half a point.
On the domestic front, the model, which pursues maximum growth, decreased its allocation to the SPDR S&P 500 ETF (SPY ) by 1.5% to a 18.5% weighting in the portfolio. And it increased the allocation to the SPDR S&P 600 Small Cap ETF USD (SPSM ) by 1 point to a total of 6%.
Near-Term Capital Appreciation Opportunity?
These equity adjustments aren’t massive. But they suggest a tactical, active model is finding the opportunity for near-term capital appreciation is more compelling in some of the riskier fare, such as emerging markets and U.S. small-caps, than before. They are small tweaks, but they are still a departure from where we’ve been this year.
State Street’s model rebalance isn’t the only example of renewed appetite for U.S. small-cap equities. As a category, small-cap ETFs have been largely net asset losers in 2025, and many of them remain net-asset losers in Q2. But that bleeding seems to be moderating, or revering entirely.
Consider that month-to-date, the iShares Russell 2000 ETF (IWM ), which has seen net outflows of $3 billion so far in Q2 and remains a net loser of about $4.6 billion in 2025, has now picked up $1.5 billion in net new assets in May year to date. Others include the Vanguard Small Cap ETF (VB ), which has picked up $242 million in net assets so far in May, trimming its Q2 asset loss. The SPDR S&P 600 Small Cap Growth ETF (SLYG ) has picked up $72 million in May YTD, paring its net outflows in Q2 to $153 million. There are other domestic examples, and there are also some international small-cap equities ETFs that are finding new assets.
Potential Positive Sign for Market Bulls
Will this new appetite for small-caps last? My crystal ball is cloudy. Assigning too much meaning to ETF asset flows is always tricky. That’s because they tell a tale of where money has gone, not where it’s headed. Still, the reemergence of appetite for small-cap equities this month as trade policy becomes a tiny bit clearer is potentially a positive sign for market bulls.
That said, it’s worth highlighting one final point: Diversification remains very much in vogue.
State Street’s Maximum Growth active portfolio also added new fixed income positions to the mix. It bought funds like the SPDR Bloomberg 1-3 Month T-Bill ETF USD (BIL ) and the SPDR Portfolio Long Term Treasury ETF USD (SPTL ), now at 1.5% and 1% weighting, respectively. The rebalance also saw an increase in exposure to broad commodities like the SPDR Bloomberg Enhanced Roll Yield Commodity Strategy No K-1 ETF (CERY ) and the introduction of REITs like the SPDR Dow Jones REIT ETF (RWR ) to the portfolio. Finally, among the positions left unchanged, gold, such as the SPDR Gold Trust (GLD ), and cash allocations, are holding steady, each representing — respectively — 3% and 2% of the model allocation.
Perhaps a key takeaway here is that, before we run off to buy small-cap equities as an expression of our renewed appetite for risk and home bias, let’s consider that State Street’s most risk-on active model portfolio continues to pursue diversification and safety as well.
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