On Wednesday, small-cap stocks showed signs of a potential correction, with the Russell 2000 index declining nearly 1%, edging closer to a 10% drop from recent highs. After a strong start to 2024 with a gain of 10% largely attributed to President Trump’s election and the Federal Reserve’s interest rate cuts, the Russell 2000 experienced a sharp decline of over 8% in December. Concerns about rising interest rates and a hawkish shift in the Federal Open Market Committee’s (FOMC) stance have emerged, casting a shadow over small-cap performance. Jill Carey Hall of Bank of America noted that the index significantly underperformed the S&P 500, which surged 23% in 2024, highlighting worries about small caps’ sensitivity to interest rates and refinancing risks. Furthermore, while expectations for earnings recovery in small caps are prevalent, substantial evidence remains lacking. Hall suggested midcap stocks may offer a better outlook for 2025 due to favorable earnings revisions and reduced exposure to political and rate risks. Amid this climate, other speculative sectors, including quantum stocks and cryptocurrency, have also struggled recently, reflecting broader market uncertainty.
