Why small-cap stocks are making such a big move on a Trump victory

Donald Trump’s return to the White House sparked a big move higher in small-cap stocks. The iShares Russell 2000 ETF (IWM) , which track the small-cap index, surged 6% in the premarket. That gain would mark the ETF’s best day since 2022. The fund is also on track for its fourth-largest opening gap – the difference between its open price and the previous close –on record, SentimenTrader founder Jason Goepfert noted. Small-cap stocks were seen as potential winners under a second Trump presidency, as investors expect it would ease regulations on businesses — which tend to weigh more heavily on smaller businesses. “The biggest catalyst for sustained outperformance for small caps would be a Trump win next week due to: (i) Trump’s domestic focused agenda, (ii) deregulation policy increases small business confidence, (iii) higher M & A/sponsor activity with weaker DOJ/FTC (iv) extension of individual/pass-through tax cuts, (v) a larger fiscal package passed by Congress in 2025 removing downside to U.S. growth,” wrote Wolfe Research chief investment strategist Chris Senyek in a note last week. Wednesday’s gains in small caps were led by private prison stocks Geo Group and CoreCivic , which were up roughly 20% each. Crypto-related stocks Riot Platforms and TeraWulf surged 12% each. Small-cap stocks have trailed their large-cap counterparts this year. IWM is up 11.7% in 2024, while the S & P 500 has soared more than 21% in that time. IWM .SPX YTD mountain IWM vs SPX year to date To be sure, Wells Fargo strategist Chris Harvey noted last week that the outlook for small caps was improving thanks to a strong economy, “absorption of higher rates, and fading election risk. Notably, small caps outperformed in the 3mos after both the Trump 2016 and Biden 2020 wins.” Elsewhere on Wall Street this morning, UBS raised its price target on U.S.-listed shares of Ferrari to $513 from $478. That implies upside of 16.3%. The bank also kept its buy rating on the stock. “Q3 was widely expected to be the weakest quarter for Ferrari in 2024, primarily due to temporary headwinds, yet the company’s performance was still ahead of many peers in Luxury as well as Autos sectors,” analyst Robert Krankowski wrote.