U.S. small-cap stocks’ long-awaited rally has ignited record trading in options contracts that would benefit from their persistent strength, though some strategists say further gains could be limited.
The small-company focused Russell 2000 is up 9% over the last 10 sessions while the tech-heavy Nasdaq 100 has slipped 3% over that period in a market rotation fueled by expectations of interest rate cuts and the improved fortunes of Republican presidential candidate Donald Trump.
The small-cap rally has been accompanied by a rush into bullish options. A record 1.35 million call options on iShares Russell 2000 ETF changed hands daily over the last 10 days, Trade Alert data showed.
The trade has faltered more recently as tech stocks came roaring back on Monday, and some analysts believe small stocks may struggle to make further headway after this month’s explosive rally.
Similar rotations have not had much traction the last couple of years, said Joe Mazzola, director of trading and education at Charles Schwab.
The Russell 2000’s one-week percentage gain outstripped that of the Nasdaq 100 by at least 5 percentage points only three times over the last two years. In each instance the tech index soon regained the advantage, a Reuters analysis showed.
In the most recent example in late 2023, the Russell 2000 climbed 22% from November through December on expectations of rate cuts, but struggled to advance further when the cuts did not materialize.
The fundamental macro picture does not point to a sustained rally and the ongoing earnings season may be a litmus test, Barclays derivatives strategists said in a note on Tuesday.
Some investors see small caps as a market sector that could benefit from lower interest rates. Trump’s political agenda, with tariffs on imports and lower taxes, is also broadly viewed as friendly to smaller companies.
Megacaps Tesla and Alphabet are set to report earnings later on Tuesday, with positive results having the potential to sooth investor nerves and reignite the tech rally.
Capital One Financial’s profit fell 61% in the second quarter, it reported on Tuesday, as it set aside more money to cover losses on loans.
Net income available to common stockholders fell to $531 million or $1.38 per share versus $1.35 billion or $3.52 per share a year earlier.
“The U.S. consumer remains a source of strength in the overall economy,” CEO Richard Fairbank told analysts on a conference call.
“In this high interest rate environment, the cost of new borrowing has gone up” for mortgages, auto loans and credit cards, he said, adding that this has stretched some borrowers, but that “consumers are in reasonably good shape.”
Capital One set aside $3.9 billion in provisions for loan losses, up from $2.5 billion a year earlier.
Net charge-offs, or debts that are unlikely to be recovered, rose to $2.6 billion from $2.2 billion a year earlier.
Capital One shares were down about 0.9% in after-hours trading on Tuesday.
The company plans to strengthen its domestic card and national consumer banking businesses, while increasing its spending on marketing, Fairbank said.
Meanwhile, the lender is “all in” on its work to complete its purchase of Discover Financial, he said.
The $35 billion acquisition, once finalized, will grant the company access to Discover’s credit card network, which is the fourth-largest in the United States.
If approved, the deal is expected to be completed late this year or early next year, Fairbank said.
Opponents of the deal say that the merger will hurt consumers in the long run and create another too-big-to-fail bank, while the lender and its proponents say the deal will boost competition in payments.
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