The U.S. Small-Cap Stocks are experiencing a long-awaited moment. This is due to the expectation of rate cuts, and improved prospects of Donald Trump's election as Republican Presidential candidate, who advocates policies that benefit smaller domestic companies.

The small-company-focused Russell 2000 surged more than 11.5% over five days, the index's biggest gain in such a stretch since April 2020.

The tech and growth stock markets have also been shaky, which confirms the idea that the small cap market has benefited from the rotation of this year's top performers into less popular areas of the marketplace. The Nasdaq, which is dominated by tech stocks, has fallen 3% in the past week. Its biggest drop for the year occurred on Wednesday. The S&P 500 is up 0.2%, which is generally regarded as the benchmark for U.S. large-cap stocks.

Eric Kuby is the chief investment officer of North Star Investment Management Corp., which specializes exclusively in small-cap stock. "I hope... that this jump in the last week could be the start of a multi-year period where small caps can make up a great deal of ground."

Shares of smaller companies have been stagnant for months while investors have poured money into massive tech stocks which have led the indexes since 2024. Russell 2000 has only gained 10.5% this past year, despite recent gains. The S&P 500 is up 17% and Nasdaq is up almost 18%.

Last week, the outlook changed when a lower-than-expected reading of inflation boosted expectations that the Federal Reserve would cut rates in the coming months. This could be a boon for smaller companies who are suffering from high borrowing costs.

Jason Swiatek is the head of Jennison Associates' small- and medium-cap equity. He said that higher rates are a "headwind for small caps". On the other hand, switching to a rate cutting cycle can ease some of this pressure.

After a failed assassination over the weekend, expectations grew that Trump would win. His proposals of raising tariffs and lowering taxes could be beneficial to smaller companies.

Caribou Biosciences, a biotech company, has risen 55% since last week's inflation data. Hovnanian Enterprises, a homebuilder, is up 30% and Hippo Holdings (an insurer) has soared by over 29%.

A rotation away from tech, which has been causing concerns about stretched valuations, and prompted comparisons with the dotcom boom of two decades ago, could be a catalyst for further small-cap strength.

According to LSEG, the Russell 2000 had a market cap of $2.7 trillion at its last valuation. This is less than the market value of three individual stocks: Microsoft, Apple, and Nvidia. Each stock has a market cap over $2.9 trillion.

Peter Tuz of Chase Investment Counsel said that as money "comes out of megacap stocks" and searches for a new home it does not take much to get smaller stocks moving.

The past has shown that small-caps can benefit from a strong rally in the near term. Bespoke Investment Group reports that the Russell 2000 has gained at least 1 percent in five consecutive sessions during the past week. This is a rare occurrence. Bespoke Investment Group reports that the Russell 2000 index gained an average of 5.9% in the following month after the previous streaks.

Russell 2000 is still 8% below the peak of 2021, indicating that small caps have more room to grow.

Retail investors also buy. Analysts at Vanda Research say that inflows of money into small caps have sparked "short-squeezes," where a rising stock price forces investors to reduce their bets on it, driving the price even higher.

They wrote: "We believe there is scope for retailers to continue chasing the trade in the next 1-2 week,"

Investors in small-caps have experienced periods of strong performance before. The Russell 2000 index rose over 20% from late October to late December 2023 due to the excitement over rate cuts. However, the index fell by over 10% earlier this year after the rate cuts failed.

According to LSEG, the earnings season, which is now underway, could give small caps more reason to be proud. Russell 2000 companies are expected to report an 18% increase in second-quarter profits. The megacap growth companies, such as Alphabet and Tesla, will have the chance to reclaim their narrative next week.

Angelo Kourkafas is a senior investment strategist with Edward Jones. He said that the brokerage firm has a neutral outlook on small caps as it awaits for companies to show a stronger profit growth.

He said that to be more optimistic about the group's future, "we would need to see signs that earnings are coming in better than expected, or that economic activity has started to pick up."