Russell Index Forecast
Russell Small Caps 2025
With the news that Joe Biden has resigned as Dem Party leader, the S&P, NASDAQ, and Dow roared forward this Monday morning.
The Russell 2000 however headed downward. The resignation stirs hopes of a Republican win which would go good for stocks going forward into 2025. The small caps however fell .26% as perhaps some investors are rotating back out.
A number of stock market analysts have been forecasting a rotation of funds into small caps. A lot of that money was rolling out of industrials, and tech stocks including AI stocks and the Mag7 megacaps.
JP Morgan believes the attraction to small caps is due to a forecast of poorer performance for large caps on the S&P and NASDAQ. Both retail and institutional investors are looking for better returns. Additionally, there is momentum in small caps, with a recent 9% rally. Investors are attracted to rising stock prices. Others anticipate the return of small business, particularly next year when rates are expected to fall.
Some anticipate lower Fed rates in September, but FED chair J Powell has not dropped rates in the last 13 months, despite a steep drop in inflation. He would have to go back on his word regarding the 2% inflation target. His last communication was not supportive of a rate cut in 2024.
So there’s speculation about a drop when the FED is looking for prolonged proof that inflation is done. With summer spending continuing that includes staycations in the US, we may not see a drop in inflation until the fall. Being so close to an election, it is the usual practice not to bring changes in the lending rate near the Nov 8th date.
The rotation looked like it was forming, as you can see in this graphic from Google Finance, it rose strongly from July 10th to the 16th before the correction.
In the last 3 days of last week, Wednesday to Friday, a selloff of small caps and industrials, as well as the rest of the market happened. With other economic setbacks including the xChina trade talk, computer meltdowns, and jobs reports, the Russell stocks are not immune to a pullback.
And a few stock market analysts/experts still believe the stock market is in for a 10% correction. That can make some investors vary wary and likely to pull the plug on small caps. Of course, any major decline at this point represents an outstanding buying opportunity. Economists have forecasted a dim 2025, but they weren’t viewing historic facts about President Trump’s influence on the stock market.
The Russell rose 60% during President Trump’s term in office, up to the Covid pandemic collapse. There is no reason to believe the same growth won’t happen again.
Why Would Money Rotate into Small Caps?
The reasoning for the Russell 2000/3000 small-cap hype is due to the expectation of lower interest rates which would benefit small businesses who would see lower financing costs. And of course, small business customers would have more to spend thus driving higher revenues for SMBs.
With rates falling, the economy okay, unemployment acceptable, it’s deemed a goldilocks scenario. Higher inflation is not expected, so this makes investors and analysts a little more optimistic that the recession is nearing its end.
Investors believe a broadening of the stock market will happen and that investors will abandon the S&P megacaps and buy small caps. It means the price of Amazon, Google, Microsoft, Tesla, Netflix, Apple and others might fall drastically. Since those stocks make up most of the S&P and NASDAQ, we’d expect the outflows would lead to a drastic decline.
However, the forecasts for the S&P small caps are rosy.
Another big reason for a jump in the Russell 2000/3000 small caps is that institutional investors have big short positions on these stocks. If the market changes suddenly, they will have to cover these short positions by buying. If market messaging gets positive, it could ignite a strong rotational rally.
Further, although there is much uncertainty in the Presidential election outcome, the Republican candidate, who is offering much more to all businesses, is going to win. The last time Donald Trump was elected, the Russell index rallied 10% within 5 days, a further 7% over the following 30 days, and was 14% higher one year later.
This time however, there is much stronger support for the Republicans, even if they’re not enamored with Donald Trump.
Best Russell 2000 Stocks to Buy?
It’s never easy to pick winning stocks, but analyze the last 30 days to view the stocks that are performing recently. This Barchart chart reveals the best performers over the last month. Many of them are unknown companies which makes it risky fo the average retail investor. You may want to look for guidance from an investment advisor if you’re limiting your investment to a few stocks.
You may want to be cautious, as the recent pullback warns of volatility, and that a recovery for small businesses, may be months to 6 months away. The US economy has many threats and headwinds in this second half of 2024. The new President will have his hands full trying to revive small companies.
Investor mood toward small caps soured considerably, but as the chart from Google Finance reveals that sentiment is reversing.
Growth of the Russell 2000 as you can see rvals that of the S&P in the last 3 months. The Dow Jones has lagged as well, which sets up an interesting combination with the small caps if you can find those stocks that will benefit when manufacturing returns. As this chart from Yahoo Finance shows, the Dow is on a weekly upward trend of late.
What is the Russell 2000 Index?
The Russell 2000 index is a gauge of the 2000 smallest market cap stocks in the Russell 3000 index. There is also a Russell 1000 index. The 2000 index seems to be a better gauge of the real economy and of how small businesses are faring.
The Russell 2000 index (US Small Cap 2000) is a the leading global index in the US, created in 1984 by the Frank Russell Company, which is part of the London Stock Exchange.
The chart below shows the sector weighting of the Russell 2000. Health Care, Financials, Info Tech and consumer discretionary stocks are favored. Industrials, energy, and materials are gaining ground of late. Small cap stocks in these sectors may be ideal.
NASDAQ.com cites 3 companies worth a look: iRobot,
In this video, the Motley Fool’s Brian Richards talks about why Russell Index stocks might be a wise choice in general. And currently, these stocks might offer the best stock price growth potential.
See more on the outlook for the best stock market sectors and in-depth views of critically important market data and news.