Ignore Small-Cap Stocks at Your Own Opportunity Cost

• Russell 2000 gained 7%+ in 2026 and set record highs, while S&P 500 has traded in a tight 6,770-6,920 range with no progress since late October
• Short interest on Russell 2000 components reached multi-year highs, indicating potential short covering could fuel further rallies as bears are caught 'flat-footed'
• Global equity funds saw $71 billion in inflows last week (35x the prior week), with $62 billion moving out of money market funds in the third-largest such shift on record

Market Summary: Small-Cap Stocks Present Opportunity Amid High Short Interest

Key Market Developments:

The Russell 2000 Index (RUT) has significantly outperformed the S&P 500 in early 2026, with the small-cap index up over 7% year-to-date versus minimal gains for the SPX. The RUT recently achieved all-time highs near 2,669, while the SPX (6,916) remains rangebound near its late-October peaks around 6,920.

Critical Data Points:

• RUT component short interest has reached multi-year peaks, creating a bullish contrarian signal
• Goldman Sachs reported massive equity inflows of $71 billion last week (versus $2 billion previously), representing a 35x increase
• Money market fund assets declined by $62 billion—the third-largest outflow on record
• The SPX has traded within a tight 6,770-6,920 range for 39 of the last trading sessions
• RUT has rallied over 10% from late October levels while SPX has made no progress

Market Implications:

The analysis suggests improved market breadth as investors rotate from mega-cap technology stocks into underperforming smaller-cap names. High short interest combined with new highs in the RUT indicates potential for continued short covering and upward momentum. The shift from cash (money market funds) into equities provides additional support.

Investment Thesis:

Senior VP Todd Salamone warns of "opportunity cost" for investors ignoring small-caps. The combination of record short interest, improving breadth, and capital flowing from sidelines creates favorable conditions for small-cap exposure beyond traditional mega-cap technology leaders within the SPX.

The technical setup remains constructive, with multiple support levels established and bears potentially caught off-guard by the rotation into previously lagging sectors.