RUSSELL 2000

The Russell 2000 Is Having An Unexpected Breakout After Years In Bear Market Territory

It used to be, “Go big, or go home,” but Wall Street is shifting gears. Since late 2023, mega-caps have been the place to go to beat the market — with large-cap stocks like Nvidia ($NVDA) and Microsoft ($MSFT) driving the S&P 500 to new highs. But in recent weeks, investors have adopted a new motto: Go small or risk missing out on the next major rally.

Small-cap comeback: Investors are suddenly embracing small-cap companies after two and a half years of underperformance. Over the past month, the iShares Russell 2000 ETF ($IWM), which tracks the Russell 2000 index, has surged 9% — while large-cap competition such as the S&P 500 and Nasdaq-100 have remained relatively flat. Analysts have long anticipated the breakout but are still surprised by it — citing high large-cap valuations, potential interest rate cuts, and political uncertainty as possible reasons for the rally.

• The Russell 2000’s ten largest components represent just 3.33% of the index — offering more diversification compared to large-cap indices.

• Top performers in the Russell 2000 include Longboard Pharmaceuticals ($LBPH), Avidity Biosciences ($RNA), and Emergent BioSolutions ($EBS), which are up 496%, 398%, and 366% year-to-date.

Can Small-Caps Take The Next Big Leap?

Despite recent gains, the Russell 2000 is still 8% below its Nov. 2021 peak. However, there’s optimism that smaller growth stocks may soon recover. Historically, small-caps have outperformed large-caps two-thirds of the time since 1927. And some analysts believe the index will rally on.

• DataTrek attributes the Russell’s recent performance to a “dramatic shift in investor sentiment” that could drive further gains.

• Fundstrat’s Tom Lee predicts a potential 40% rally for the Russell 2000 by the end of summer.

Too much, too soon? Almost all of the Russell 2000’s gains this year came in the last ten trading days, raising BlackRock analysts’ concerns that the index might “lose some steam.” Additionally, the Russell 2000’s price-to-earnings ratio has climbed to 28x, surpassing the S&P 500’s 24.2x, suggesting it may be becoming overpriced.

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LARGECAP RECAP

👨‍💻 Google’s AI Investments Aren’t Paying Off Yet. Their Solution? Spend Even More.

“You have to spend money to make money,” but Google’s ($GOOG) AI investments are still struggling to make the math work. This week, parent company Alphabet’s earnings exceeded Wall Street forecasts by just 0.6% — the smallest margin in over five years. Despite cost-cutting and a reduced workforce, Google continues to pour funds into what Alphabet CEO Sundar Pichai calls a “transformative area” — artificial intelligence.

• Google plans to increase its capital expenditures to $52B by 2025 to boost its AI technology, even though it still hasn’t realized a substantial financial return.

• Pichai defends this spending, stating, “The risk of underinvesting is dramatically greater than the risk of overinvesting for us here.”

Race to AI-ndependence: OpenAI CEO Sam Altman and Co-Founder Ilya Sutskever expected their AI technology to stay ahead by one to two years. However, as many companies increase spending and investments in AI, their prediction seems off. Today, open-source, publicly accessible AI systems match the performance and capabilities of privately developed, closed AI systems. While ChatGPT-4 remains a leading model in chatbots, competitors like Anthropic’s Claude 3.5 Sonnet and Google’s Gemini are quickly catching up.

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Markets & Economy

Small banks defend real estate loans: Community banks argue that their commercial real estate portfolios focus on smaller, fully leased local properties instead of troubled office towers in major cities. Regulators continue to monitor banks exceeding loan thresholds. [Read]

Green bonds hit record highs: Green bonds, used to invest in sustainable projects, hit new issuance highs in the first half of 2024. Most G7 countries are participating, with Japan and Italy making notable contributions, though the US remains an outlier with no issuance. [Read]

Coinbase gets Citi rating upgrade: Citigroup ($C) upgraded Coinbase ($COIN) to “buy,” citing potential regulatory shifts benefiting crypto. This has led to the most favorable analyst consensus in two years, with a price target of $345. [Read]

Business & Wealth

Job market cools from pandemic highs: US unemployment rose to 4.1% as the pandemic hiring surge subsides. While still considered strong, the job market shows signs of normalizing with slower wage growth and increased competition for positions. [Read]

Visa reports rare revenue miss: The payments giant fell short of Q3 revenue expectations due to reduced consumer spending, particularly among lower-income Americans. Despite this, Visa ($V) maintains substantial payment volumes and reaffirmed its annual forecast. [Read]

Meta removes romance scammer accounts: Facebook’s parent company took down ~63K accounts linked to the “Yahoo Boys” sextortion group. Meta ($META) also banned future content from the group and is testing new safety features. [Read]

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DIGIT OF THE DAY

More Than 270K Unwanted Olympic Tickets Available On Resale Websites

What do the Paris Olympics and poker have in common? Both are hoping for a full house. Despite the excitement around the world’s biggest sporting event, there are more tickets than fans might use. Initially, fans had to buy ticket bundles for three events, with the promise of easy resale for any unwanted tickets. But with lower demand on the resale market and additional tickets being released, a surplus has emerged.

• Over 270K tickets for various Olympic events are currently up for grabs on resale sites, a sharp rise from the 180K tickets available just a month ago.

• However, Paris has set a new record by selling 8.85M tickets — with premium seats for the opening ceremony fetching up to ~3K EUR each.

Ticket troubles: Many hotels and apartments that anticipated a boost from the Olympics are now lowering prices. Airlines are seeing fewer summer bookings to Paris as the Games have dampened the usual tourist interest. Disappointed fans on platforms like Reddit have vented their frustration over not being able to offload their tickets — describing their situation as dealing with “sunk costs” due to non-refundable booking fees.