Stocks are struggling at the start of trade as lingering trade worries stick to this market, though investors managed to shake that off on Monday. That setup could work again for Tuesday.
The S&P 500 SPX is only 3.78% off its February highs, after May’s record gains, though it remains to be seen if the rally will keep going through the long days of summer. That’s as other segments of the market have been thoroughly overlooked when it comes to buying the dip this year.
For example, the Russell 2000 RUT is down 7.17% in 2025, and sits over 15% away from the record close seen in Nov. 2021. That’s versus a near 1% rise for the S&P 500 so far this year.
That brings us to our call of the day from a team at Evercore ISI, led by Julian Emanuel, who say June marks the best seasonal opportunity for small-cap stocks, so dive in.
They note that large-cap stocks have outperformed smaller names by 9% through May, an underperformance for the latter that isn’t too hard to understand. Tariff uncertainty and stress has hit smaller companies that are more domestically focused and vulnerable to interest rates and consumer moods.
But Emanuel and his team argue that the month of June, which aligns with the Russell Index rebalance, has historically favored smaller companies. “Moreover when large size outperformance through May had been similarly vigorous as it was in 2025, June seasonality is especially pronounced,” they said.
So they see a “catch-up” window coming for the month of June, when small-caps will push ahead of large companies. “The case for small cap outperformance is reinforced by an attractive multiple relative to large, and with the Fed on track to cut rates further while the economy is forecast to grow modestly in 2025.”
Emanuel and his team suggest investors get broad exposure to smaller stocks via the iShares Russell 2000 ETF IWM.
While overall, small cap has struggled, the ETF has some names that have performed strongly this year, such as Hims & Hers Health (HIMS), up 134%, which got a boost in April from joining with rival Novo Nordisk, behind the weight-loss drug Wegovy. Sprouts Farmers Market (SFM) is up 41%, and some money managers like the organic grocery store for the fact it has locally produced foods that can shield it from tariff wars.
To be fair, it would seem a call for small-cap stocks is fairly contrarian as many Wall Street banks have steered clear of discussing the beaten down sector. However, Fundstrat Global Advisors’ head of research Tom Lee has also made the case for small-caps.
He said when investors start to believe the tariff stress is behind them, and start to look into 2026 and realize a dovish Fed is likely next year, beaten down small-cap stocks will look like a smart play.
