The stock market seems to be going through a major upswing. In the past few months, stocks have been rallying to all-time highs across major indices. One of the markets that has seen the biggest gains is the small-cap sector. Small-cap stocks have seen significant bullish rotation, with investors rotating out of heavily weighted, cyclical large-cap stocks and rotating into more- defensive small-cap names. This trend has been seen as a sign of bullishness, and it looks like it’s only going to continue.
What’s causing this bullish rotation? One reason is that investors are becoming more positive about the small-cap sector. Small-cap companies often have the capability to tap into new revenue streams and outpace the industry giants on revenue growth, which investors have been attracted to. Furthermore, small-cap stocks often lack the attention of institutional fund managers, and thus are likely to be undervalued.
The bullish rotation in small-caps has been bolstered by the Federal Reserve’s recent rate cuts and the reintroduction of quantitative easing. The rate cuts have led to lower interest expenses for small-cap companies, providing a boost to their bottom lines. This has been compounded by the low borrowing costs from quantitative easing, which has allowed small-cap companies to finance their operations without diluting their shareholders. All of these factors have made the sector more attractive to investors.
It seems as though the bullish rotation in small-caps is likely to continue, further supporting gains ahead. There are very few signs of any major shift in sentiment, and there seems to be strong support for the direction that small-cap stocks are headed. The sector has outperformed its large-cap peers and is now seen as a vehicle for growth. Going forward, the positive sentiment surrounding the sector should remain, with the potential for further gains ahead.