Small-cap stocks may be rotating into the spotlight, but not all names will emerge as the next winners, according to Wolfe Research. Small caps fell out of favor last year as larger companies — particularly high-flying tech titans — propelled the market’s bull rally. But with all stocks except Nvidia and Meta lower on the week, the “Magnificent Seven” isn’t looking as magnificent right now. As of Thursday’s close, Nvidia leads the group with an 13% gain this week. On the other hand, weak sales figures in China have respectively driven shares of Tesla and Apple lower by 12% and 6%. But while the technology sector loses its steam, another category of stocks have come into focus — small-cap names. Going into 2024, investors widely expected small caps to outperform as the market rally broadened. While the momentum has been slow to start for smaller stocks, it seems like this rotation is finally beginning to play out beneath the surface, according to Wolfe Research. “One by one, we’re losing leadership from a member of the Mag 7, as breadth steadily expands. Over the past couple weeks, Small Caps seem to finally be catching that much awaited bid,” wrote strategist Rob Ginsberg in a Wednesday note. As evidence, he pointed towards the outperformance of the Russell 2000 , the benchmark small-cap index. On Thursday, the Russell 2000 closed at 2,084.74, clinching its highest closing price in two years. “The Russell 2000 is now convincingly through $2k with momentum at its back and price not yet overbought. It looks like a safe bet that we see these gains extend into the $2100 – 2200 region,” the strategist. However, Ginsberg highlighted that not all small caps are equally outperforming, with the current rally led by the top few names. On the flip side, this means that there’s plenty of room for the rally to broaden out. Ginsberg also shared some of his favorite small-cap names in the report. Here are some of the stocks that were included: TripAdvisor , up 22% this year, was one name on the list. Shares received a boost last month after the company reported a fourth-quarter earnings and revenue beat. Most analysts covering the stock have currently assigned it a hold rating, with consensus showing a potential upside of about 1%. Other stocks Ginsberg highlighted include regional bank First Bancorp , industrials manufacturer Standex International and health-care tech Astrana Health . — CNBC’s Michael Bloom contributed to this report.
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