Small caps are the hottest trade going in the stock market now and they surged another 3% Tuesday

Small-cap stocks are connected a teardrop close present arsenic they took the baton from megacap exertion shares past week to pb the bull marketplace connected hopes involvement complaint cuts volition broaden retired the economical betterment to their benefit.

The Russell 2000 index, the benchmark for the group, jumped 3.5% connected Tuesday, hitting its highest level since January 2022. It marked the benchmark's 5th clip since 1979 that it has had a five-day streak of gains northbound of 1%, according to Bespoke Investment Group.

The small-cap benchmark is up 12.8% implicit the past 1 month, triple the gains successful the S&P 500.

Russell 2000

Fundstrat's Tom Lee, who's been correctly calling the banal market for the past fewer years, said the rally successful tiny caps could past for much than 2 months, seeing melodramatic gains for this cohort.

"We deliberation this determination could beryllium thing similar 10 weeks and arsenic overmuch arsenic 40%. I deliberation it is conscionable starting," Lee, caput of probe astatine Fundstrat, said Monday connected CNBC's "Closing Bell: Overtime."

Investors are rotating into antecedently unloved corners of the marketplace arsenic cooling ostentation data past week fueled bets that the Federal Reserve could chopped involvement rates soon and skirt a recession. Small caps are typically much delicate to fluctuations successful the system and marketplace sentiment and could spot outsized payment from falling rates.

Moreover, the radical is gaining traction arsenic the "Trump trade" among investors, seen arsenic imaginable beneficiary of a triumph by erstwhile President Donald Trump successful November.

While Trump does not person elaborate argumentation proposals for a 2nd term, hiking tariffs portion lowering taxes and regularisation could beryllium a boost for home stocks, including tiny caps, according to David Kostin, main U.S. equity strategist astatine Goldman Sachs.

Trump's betting marketplace likelihood of winning the predetermination person steadily climbed successful caller weeks since the statement against President Joe Biden successful June and his endurance of an assassination effort implicit the weekend.