Largecap stocks on Wall Street seem to be getting back in the groove, catching up smallcap peers as US stock markets reach record highs. “The Russell 1000 has been regaining ground from the Russell 2000 since mid-March, coinciding with easing in the long-term US Treasury yield from peak of 1.75% to around 1.5% by June end, and the flattening in the US yield curve,” said Mark Barnes, head of investment research (Americas) and Christine Haggerty, equity research, FTSE Russell. The Russell 1000 and Russell 2000 are up 14.9% and 17.4%, respectively, so far this year.
Earlier, as the world anticipated a robust economic growth post-pandemic, smallcap stocks started outperforming. “Small-cap outperformance earlier in the year was powered by expectations that the accelerating US vaccination rollout and easing lockdown measures would usher in a period of robust economic growth as activity normalized,” Barnes and Haggerty said. The promising future outlook saw investors pick stocks that would benefit from the reflation economy, at the expense of last year’s pandemic outperformers, predominantly large-cap tech stocks.
Now as the stock markets in the US scale record highs, overcoming turbulence triggered by fears of runaway inflation and a preemptive Fed policy pivot. shifting macro conditions have fueled a dramatic reshuffling in market leadership, according to FTSE. “That calculus has changed with the rally in 10-year Treasuries and unwinding of the reflation trade, which gathered pace following signals from the Fed at its June meeting that it may not be as tolerant of higher inflation than previously telegraphed under its new policy framework,” they said.
In the last few months, growth heavy sectors such as technology and consumer discretionary, have reversed their earlier underperformance since mid-May, while traditional value sectors (most notably financials) have lost favour. This has helped FTSE Russell 1000 index outpace the Russell 2000. Since the end of March this year, Facebook, Amazon, Apple, Google, and Microsoft — some of the biggest tech names on Wall Street — have jumped more than 17% each. Along with tech stocks, retailers such as Target and Costco have rallied 14% and 23%, respectively. “Though the Russell 2000 benefited from many of the same groups — notably technology, consumer discretionary (e.g., media) and health care — their contributions were smaller than those of their large-cap peers,” Mark Barnes and Christine Haggerty said.