June effect is coming? US small cap stocks are expected to break out of the downturn

Notice that the smallest stocks in the United States have entered a historically strong period in the year, bringing hopes of a rebound for the underperforming stocks at the beginning of 2025. Analysis by Evercore ISI strategist Julian Emanuel shows that since 1990, small-cap stocks have outperformed large-cap stocks in June 60% of the time. This seasonal characteristic becomes more pronounced when large-cap stocks outperform small-cap stocks, as is the case this year: in this scenario, small-cap stocks have outperformed large-cap stocks every time in June. If history repeats itself, this period will be a long-awaited bright spot for small-cap stock investors. The Russell 2000 small-cap index has not reached a new high since 2021, with uncertainty triggered by President Donald Trump's trade war shocking the market, causing the index to fall by 5.9% year-to-date. The S&P 500 index has also experienced dizzying volatility, but has risen by 1.5% year-to-date, just a few percentage points below its February high. Emanuel said, "What we have is a classic 'when it's bad, it's good' for small caps. Buying these stocks is a trade on a potential reversal in performance in June, and perhaps holding on longer if macro catalysts like a trade deal materialize." Small-cap stocks initially benefited from the market enthusiasm following Trump's election at the end of last year, as investors bet that his promises of lower taxes and reduced regulation would help small companies. However, the focus of the Trump administration on tariffs - another key part of Trump's policies - raised concerns that small-cap companies would be more vulnerable to the economic turbulence that could result from a trade war, causing investors to lose interest in small-cap stocks in the early months of 2025. Despite some high-risk stocks rebounding in the market boosting small caps, position data shows that traders still have a negative view on this sector. The ratio of outstanding call options on the Russell 2000 index to outstanding put options hovered near its lowest level since February earlier this week, indicating that market participants are preparing for further downside. The indicator slightly tilted more bullish on the previous trading day. At the same time, bearish bets on small-cap stocks have been increasing. According to data from S3 Partners, short positions in the iShares Russell 2000 ETF have risen to the highest level since 2022 in USD terms, indicating the magnitude of the risks being bet on by bearish investors. Derivatives specialist Jeff Jacobson from 22V Research noted that the accumulation of bearish positions also sets the stage for a rise, if prices rise or positive news leads these investors to unwind their bets on small-cap stocks. Jacobson said, "We see these 'consensus' views rapidly changing in the short term." Strategists suggest that there are signs that the United States is reaching constructive agreements with its trading partners, coupled with strong economic data, which may enhance the attractiveness of this sector. While it is still early, small-cap stocks have performed well so far this month. The Russell 2000 index outperformed the S&P 500 index in the first three trading days of June, with gains exceeding 0.5 percentage points. Technical strategists who use chart patterns to predict stock movements also see constructive signals. Analysts from Piper Sandler noted that the Russell 2000 index is nearing a "turning point" at around 2100 points. They wrote on Wednesday that a breakthrough at this level could lead to a 19% increase to 2500 points by mid-August. Jacobson from 22V also expects a "fairly significant rise" in small-cap stock indices in the short term.