The US small-cap Russell 2000 index achieved its first intraday record high on Friday since the eruption of the US-Iran conflict. This significant movement sees the Russell 2000 joining other major US indexes at all-time highs, signalling a notable broadening of the recent equities rally beyond predominantly large companies. The index’s resurgence follows a period of volatility, having confirmed a correction, defined as a fall of 10% from a recent peak, less than a month prior.
Small-cap stocks are typically more sensitive to prevailing interest rate expectations, rendering them particularly susceptible to shifts in inflation risks. Earlier concerns over a potential rise in oil prices, following the temporary closure of the Strait of Hormuz during the US-Iran conflict, had revived inflation worries and clouded the outlook for Federal Reserve rate cuts. However, Iranian Foreign Minister Abbas Araqchi confirmed on Friday that the Strait of Hormuz was open subsequent to a ceasefire accord reached in Lebanon, leading to a sharp fall in oil prices and subsequently lifting risk assets globally.
Entering the year, small-cap stocks were considered a favoured trade among investors. The robust rally in artificial intelligence (AI)-linked names had encouraged market participants to explore opportunities beyond technology heavyweights, seeking undervalued segments of the market. Should geopolitical risks firmly move into the rear-view mirror, this trend of investor interest in small-caps may regain significant momentum. So far this year, the Russell 2000 has notably outperformed the benchmark S&P 500, the tech-heavy Nasdaq, and the blue-chip Dow Jones Industrial Average, with the S&P 500 and Nasdaq also hitting record intraday highs earlier in the week.
