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After a difficult two years for small cap stocks, the sector finally appears on path for a comeback, according to Citi Research head of U.S. equity strategy Scott Chronert. The small cap benchmark Russell 2000 index is up 4.3% week to date alone amid a 9.4% rally in July. As investors become more enthusiastic on the prospect of forthcoming interest rate cuts, they’ve started to sell off mega cap technology names — which have led the market rally — in favor of the rate-sensitive small cap sector. Chronert told CNBC’s “Squawk on the Street” that he believes the sector has “super attractive” absolute and relative valuations as the Federal Reserve begins to loosen monetary policy. .RUT YTD mountain Russell 2000 in 2024 “Typically, when you go into this Goldilocks scenario where we get a Fed pivot, easing rate influence, combined with some renewed confidence that we can navigate something that comes close to a soft landing — I think the small cap rally has legs here,” Chronert said. He noted that while the Russell 2000 contains less exposure to the AI growth trade, it has a large exposure to one of his current favorite sectors — banks — which he called “the cleanest Trump trade right now.” Banks currently have an “easier” valuation starting point, according to Chronert. He added the Fed’s pivot, and even a bearish steepening yield curve, will prove positive for the sector’s fundamentals. The sector overall contains little exposure to tariffs — which has become a major campaign platform of former president Donald Trump. “The icing on the cake is that you then factor in some deregulatory spin … I think the banks are in a really good position,” said Chronert. Chronert’s forecast for the large-cap benchmark S & P 500 year-end is 5,600, right around where it is trading now, according to the CNBC PRO Market Strategist Survey.
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