The Russell 2000's sharp outperformance this year has been celebrated as proof that the market rally is finally broadening beyond mega-cap technology stocks. iShares Russell 2000 ETF (NYSE:IWM) is up 17.38% year-to-date, compared to State Street's SPDR S&P 500 (NYSE:SPY) at 10.46%.
Yet the narrative that investors are more confident about economic growth and rotating into cyclical areas is colliding with a dangerous macro setup.
Markets are increasingly pricing in the possibility that the Federal Reserve may need to keep rates elevated for longer — or even raise them again before year-end.
The CME FedWatch tool shows a near 40% chance of at least one rate hike by year's end.
That risk translates directly to small-cap stocks, as they remain among the most rate-sensitive segments of the equity market.
