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Forget Apple and Nvidia. Why June Belongs to Small-Caps.

Illustration by Elias Stein

Referenced Symbols

Small-cap stocks snapped back with a vengeance in June after a May that was all about large-cap tech. It’s a sign investors are growing less worried about the big picture.

The S&P SmallCap 600 index fell 2% in May, while the Nasdaq 100 surged nearly 8%.

Then things flipped: In June, the S&P 600 is up more than 8%; the Nasdaq 100 is essentially flat. May’s rally was driven by investor enthusiasm over artificial intelligence, benefiting a narrow group of already highly valued stocks.

Meanwhile, the rest of the market held its collective breath over debt-ceiling talks. Large-caps are viewed as safer than small-caps, with more-diversified businesses, greater resources, and stronger balance sheets. They tend to outperform when investors are wary of taking on more risk.

With a debt-ceiling deal and AI mania fading, the rally has broadened. Since the start of June, the S&P 500 index is up 2%, while the average stock has returned 4% and tech giants like Nvidia and Apple have gained less than 1%. Small-cap outperformance in June has been an extension of the rally’s broadening to more cyclical and economically sensitive sectors. Investors have shown less economic and financial-system fears—regional banks settled down—making many small-caps more attractive.

The result: outperformance by sectors that make up a much larger portion of small-cap indexes than large. Tech is 27% of the S&P 500 versus 13% for financials and 9% for industrials. In the S&P 600, financials and industrials make up 34% and tech just 14%. Will the rejuvenation of small-caps continue? Only if the outlook looks even rosier.

Write to Nicholas Jasinski at nicholas.jasinski@barrons.com

Last Week

Semblance of Normalcy

With the debt-default drama over, Treasury launched a trillion-dollar borrowing spree, which could pressure banks as yields rise. Jobless claims climbed to their highest level since October 2021. China exports fell in May, and its government took steps to aid real estate and manufacturing and asked banks to cut deposit rates. On the week, the VIX spiked, then subsided. The Dow Jones Industrial Average rose 0.34%, to 33,876.78; the S&P 500 was up 0.39%, to 4298.86, ending its longest bear run since the 1940s; and the Nasdaq Composite saw a 0.14% gain, to 13,259.14.

More Trump Charges

In a widely expected move, the Department of Justice indicted former President Trump and an aide on 38 counts of mishandling classified documents, including obstruction of justice and violations of the Espionage Act.

More Oil Cuts

At an OPEC+ meeting in Vienna, Saudi Arabia cut another million barrels a day of oil output next month, an attempt to raise flagging prices. OPEC also agreed to reduce quotas of four African nations and Russia, while raising that of the United Arab Emirates.

The Dam Breaks

Ukraine and Russia accused each other of an explosion that breached a dam across the Dnipro River in southern Ukraine, threatening thousands and the Zaporizhzhia nuclear plant. After weeks of probing Russian lines, Ukraine finally began its counteroffensive, using German tanks to drive into the southwest.

Smoke Alert

Heavy smoke from record Canadian wildfires flowed into the Ohio Valley and down the East Coast, then spread south, forcing cancellation of outside events, disrupting air travel, and bringing back masks.

The Corporate Front

Apple introduced a $3,499 mixed-reality headset, its first major product in over a decade. The share price hit a high, then sank on news of the hefty price...The Securities and Exchange Commission sued crypto exchange Binance and founder Changpeng Zhao on 13 charges, including commingling customer assets and diverting funds to its trading operation. A day later, the SEC brought charges against U.S.-based Coinbase Global...GameStop fired its CEO, and Warner Bros. Discovery cut loose CNN CEO Chris Licht...Palo Alto Networks will replace Dish Network in the S&P 500...General Motors joined Ford Motor in a deal to use Tesla Superchargers.

Annals of Deal Making

Illumina is appealing a decision by an in-house Federal Trade Commission court blocking its buy of cancer screener Grail...In a shocking turnabout, the PGA Tour agreed to merge with LIV Golf, the Saudi-backed breakaway tour. The pair had been locked in bitter litigation...Sequoia Capital said it would separate its U.S. and Chinese businesses...BlackRock is buying Kreos Capital, a major provider of loans to venture start-ups. The price wasn’t disclosed...Reuters reported that Elon Musk’s Neurolink was worth about $5 billion, based on private stock trades.

Write to Robert Teitelman at bob.teitelman@dowjones.com