Stock markets today: Dow rises, Nasdaq slips as new earnings roll

The small-cap Russell 2000 ( ^RUT ) index rose more than 1.5% on Wednesday, outpacing the gains of all three major indexes and closing at a 52-week high of 2,300.

If the Russell closes at its current level, it marks the highest close for the index since November 2021.

Small caps were one of the most debated trades on Wall Street in 2024. Given the sector's higher exposure to refinancing risk, strategists have argued that lower rates would benefit the group. That thesis, combined with evidence that the U.S. economy is tracking for solid growth, once again makes the case for an allocation to small caps, according to Wall Street strategists.

Morgan Stanley Chief Investment Officer Mike Wilson recently moved to a “neutral” position on allocations to small versus large caps after the Federal Reserve cut interest rates by half a percentage point in September.

“For us to be fully bullish on small caps overall, leading macro indicators will likely need to show that a clear acceleration in growth is coming,” Wilson wrote in a note to clients on Tuesday. “For now, we're focused on idiosyncratic opportunities within the small cap space.”

He added, “Valuations are relatively cheap for small caps, with earnings set to improve. To some extent, this has been the mantra of the small cap index for nearly two years, but after consecutive years of earnings contraction, the consensus is more optimistic. Earnings expansion is ahead.”