Danske Research Team notes that US equities advanced, with the S&P 500 up 0.6% and the Russell 2000 outperforming with a 1.8% gain. The analysts stress that small caps are unusually strong given a perceived narrow tech-led rally and shifting rate expectations. They continue to favour small caps, citing improving earnings and attractive valuations.

Small caps outperform in broadening rally

"Equities were generally higher yesterday, with US in catch-up from holidays. S&P500 up 0.6% but small cap Russell 2000 the standout, up 1.8%."

"It is rare to see small caps performing so strong in what many perceive as a narrow tech rally (16% vs S&P500 10% ytd). Especially, as consensus has turned from rate cuts to rate hikes over the last months. However, we continue to like small caps. "

"Although tech took the attention in the last earnings season, the rest, "S&P 493" delivered the strongest earnings growth since 2021. Earnings are turning, macro support even higher earnings growth ahead and valuation is attractive."

"This was another hot day for momentum stocks, up 3.4% in one go. Tech did the bulk of this, with Micron rallying 19% (!) after UBS tripled its price target. The chip frenzy is continuing in Asia this morning with Kospi up 4%."

"Samsung the standout, having reached a deal with workers this morning and averting the 18-day strike. This is actually good news for everyone, as a strike would have amplified the chip shortages even further. US and European futures are slightly higher this morning."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)