The market quietly staged a style switch! The Russell 2000 index approaches a "golden cross."

While investors are eagerly chasing large-cap tech stocks and the concept of artificial intelligence, the market is quietly undergoing a shift in style with small-cap stocks and cyclical stocks making a comeback. Since the second half of 2025 began, economically sensitive sectors that were previously overlooked have resurged, fueled by factors such as technical breakthroughs, a resurgence in market risk appetite, and funds withdrawing from popular AI trades, sparking a strong rebound. Since July, small-cap stocks have been particularly eye-catching amid the overall rise in the US stock market. As of now, the Russell 2000 index, representing small-cap stocks, has risen by approximately 3.5% this month, outperforming the S&P 500 index (+1.7%) and the Dow Jones Industrial Average (+0.9%). Of particular note is the Russell 2000 index approaching the "golden cross" in technical analysis, where the 50-day moving average crosses above the 200-day moving average, typically seen as a signal of entering a new uptrend. This would be the first occurrence of a golden cross for the Russell 2000 since January 2, 2024. According to Dow Jones market data, since 1985, the golden cross has often signaled an upward trend for small-cap stocks in the following 3 months, 6 months, and even 1 year. Although technical signals are positive, the fundamentals remain fragile. Some market participants are skeptical about the sustainability of this small-cap stock rebound. Nanette Abuhoff Jacobson, Global Investment Strategist at Hartford Funds, stated that the current small-cap stock rally "appears to be temporary" as large-cap stocks have shown more stability in the current economic cycle, especially under pressures such as inflation, tariffs, and slowing economic growth. She said, "Large-cap stocks have stronger quality and profitability, making them better able to absorb the impact of rising costs and tariffs. Small-cap stock rebounds are often short-lived, and investors need to remain vigilant." Earlier this year, the market widely anticipated that Trump returning to the White House might create a friendly environment for businesses, such as tax cuts, relaxing financial regulations, reviving domestic manufacturing and supply chains, which had boosted small-cap stocks. However, the tariffs implemented by the Trump administration have added pressure on small-cap stocks. Faced with high import costs and potential inflation, small businesses are under even more pressure. In addition, persistent high inflation has put the Federal Reserve in a dilemma, unable to easily cut rates to stimulate the economy. The Russell 2000 accumulation within the year is still less than 1%, far below the S&P 500's 7.3% and the Nasdaq's 8.2%. Jim Worden, Chief Investment Officer at Wealth Consulting Group, admitted, "We expected small-cap stocks to perform better in the second half of this year and last year, but we did not anticipate the turmoil caused by tariffs and the fact that rates did not decrease significantly as we expected." According to CME FedWatch tool data, as of this Tuesday, the market prices in a 43% probability of the Fed cutting rates twice (by 25 basis points each) throughout the year. Even if implemented, rates would only decline to a range of 3.75% to 4%. Abuhoff Jacobson noted that one or two rate cuts have limited impact because current interest rates remain significantly higher than in recent years. Cyclical stocks have also been performing well alongside small-cap stocks. With the start of July, investors have started withdrawing funds from high-valued large-cap tech stocks and shifting towards economically sensitive sectors such as materials, industrials, and consumer discretionary. In the S&P 500 index, the materials sector has risen by 3.9% so far in July, consumer discretionary by 3.7%, and industrials by 2.3%, all outperforming the broader market. Although cyclicals usually have higher market capitalization than small caps and are less fragile, they are still vulnerable to rising rates and economic slowdowns. For example, consumer discretionary heavily relies on consumer confidence and spending, while industrials and materials sectors are directly linked to business investments, construction, and manufacturing. "The strong performance of cyclical stocks is more due to the fact that consumer and business sentiment remains somewhat resilient," Worden said, "In many areas, demand has not shown significant weakness."