In a new note by Andrew Greenebaum and Chris Wood, Jefferies says the “crazy train” rally in large-cap growth stocks is showing signs of spreading, finally to value and small-cap stocks.
“The rally’s been narrow, but that’s actually bullish,” says Greenebaum. “Breadth is weak, but that’s often a setup for a breakout.”
So if you’ve been wondering whether small caps are about to wake up, you’re not alone. And the data is starting to back it up.
So far, the S&P 500 is up 28% since bottoming in April. It just finished a week of setting new all-time highs every single day.
Meanwhile, the Russell 2000, the go-to index for small-cap stocks, is only up 1.2% year-to-date. That’s a massive lag.
Why the gap? Blame it on the big tech boom: Nvidia, Microsoft, and other giants have dominated the rally. But that’s starting to look stretched.
Only 3.8% of Russell 3000 stocks are at 52-week highs, compared to 9.3% in the S&P 500. Translation? The rally is still top-heavy.
Greenebaum points to a key technical indicator: the 200-day moving average (200DMA). Only 55% of Russell 3000 stocks are trading above that threshold, below the long-term average of 57%.
Historically, that kind of setup has preceded broad rallies in years like 2015 and 2023. And with Q2 earnings season heating up, Jefferies believes we’re about to see a wave of upward earnings revisions, especially in value and small-cap stocks.
“Value revision ratios are at their strongest in over three years,” says Greenebaum. “That’s a big deal.”
The narrative is shifting.
Large-cap growth has led the charge, but Jefferies thinks its dominance is waning.
Value stocks, especially large-cap value, are seeing stronger earnings revision momentum than growth.
Small caps, often overlooked and undervalued, may finally get their moment as the rally broadens out.
As markets digest more Q2 results and macro signals, there’s room for a rotation into beaten-down areas of the market. Don’t sleep on small caps or value. Their comeback might already be underway.
This market rally might feel like it’s all about big tech, but don’t be fooled. Under the hood, momentum is building elsewhere. And if Jefferies is right, we’re on the verge of a breakout for value and small-cap stocks, just as most investors are still chasing the usual suspects.
In the words of Greenebaum:
“Although value and small caps have been massive laggards this year, we think the tide could be on the cusp of turning.”
