Watch small-cap stocks as market tries to recover from last week's declines, says NYSE insider Jay Woods https://t.co/u6HDp9UOCU
)](https://www.lseg.com/content/dam/ftse-russell/en_us/insights/images/charts/aggregate-weights-of-large-holdings-in-representative-russell-indexes.svg)
Chart showing the aggregate weights of large holdings in representative Russell indexes (data as of Feb 21, 2025); it visualizes how a handful of mega-cap stocks dominate major indexes, which helps explain why a market pullback and subsequent recovery could see leadership breadth widen toward small-cap stocks — directly relevant to watching small-caps during a post-decline recovery. ([lseg.com](https://www.lseg.com/en/insights/ftse-russell/taking-the-heat-out-of-the-us-growth-stock-surge))
Source: LSEG / FTSE Russell
Research Brief
What our analysis found
Jay Woods, Chief Market Strategist at Freedom Capital Markets and a veteran of the NYSE trading floor, has urged investors to keep a close eye on small-cap stocks as broader markets attempt to claw back losses from recent declines. In a July 18, 2024 Benzinga exclusive, Woods declared that a "rotation in small caps is just starting," pointing out that the Russell 2000 index was trading within 8% of its all-time high at the time, while the iShares Russell 2000 ETF (IWM) had surged 10.9% over the prior month — outpacing the S&P 500, Nasdaq 100, and Dow Jones benchmarks over the same period.
Woods' thesis rests on a well-documented market phenomenon: rotational flows from mega-cap technology stocks into smaller, more domestically oriented companies, a pattern that historically accelerates when the Federal Reserve signals rate cuts. Multiple asset managers and sell-side research desks, including notes summarized by Goldman Sachs and BlackRock's iShares division, have documented a historical tendency for small caps to outperform in the early stages of Fed easing cycles. The IWM ETF — launched on May 22, 2000 with a 0.19% expense ratio — remains the primary high-liquidity vehicle through which institutional and retail investors express small-cap positioning.
However, the call carries significant caveats. By April 3, 2025, the Russell 2000 had become the first major U.S. stock index to enter a bear market, according to CNBC, highlighting the outsized volatility and downside risk inherent in small-cap equities. Quarterly performance reviews from late 2024 through early 2025 showed extended periods of small-cap underperformance relative to large caps, underscoring that the rotation Woods identified can be episodic and prone to sharp reversals when macro conditions deteriorate.
Fact Check
Evidence from both sides
Supporting Evidence
Direct quote from Woods on small-cap rotation
In a Benzinga exclusive published July 18, 2024, Woods stated that "rotation in small caps is just starting" and cited the Russell 2000 trading within 8% of its all-time high, with IWM up 10.9% over the prior month — providing a clear, sourced basis for the tweet's claim.
Repeated tactical market calls on major networks
Woods appeared on CNBC as recently as March 19, 2025, discussing tradable bounces and technical setups, demonstrating a consistent pattern of signaling rotational and tactical opportunities that align with the small-cap thesis.
Historical precedent for small-cap outperformance during Fed easing
Research from multiple asset managers and sell-side firms, including summaries from Goldman Sachs, BlackRock's iShares, Bank of America, and Vanguard, documents a historical tendency for small-cap stocks to outperform larger peers in the early stages of Federal Reserve rate-cutting cycles.
IWM as the institutional vehicle of choice
BlackRock's product fact sheet confirms the iShares Russell 2000 ETF (IWM) as the primary high-liquidity instrument for gaining small-cap exposure, with a low 0.19% expense ratio, giving practical credibility to a "watch small caps" call that investors can readily act on.
Contradicting Evidence
Russell 2000 entered a bear market in April 2025
CNBC reported on April 3, 2025 that the Russell 2000 became the first major U.S. stock index to fall into bear-market territory, demonstrating that the small-cap rally Woods flagged was far from durable and that investors following the call faced substantial drawdown risk.
Extended periods of small-cap underperformance in 2024–2025
Institutional quarterly performance reviews covering Q1 2025 and surrounding periods show that small caps underperformed large caps during multiple stretches, reinforcing the view that small-cap strength can be episodic and reversal-prone rather than a sustained trend.
Macro sensitivity cuts both ways
Industry commentary and ETF research notes warn that small-cap rallies tied to Fed-pivot expectations can reverse sharply if rate cuts are delayed, inflation reaccelerates, or geopolitical shocks emerge — the same interest-rate sensitivity that fuels small-cap upside also amplifies downside in adverse scenarios.
Mid-caps and sector-specific alternatives may outperform
Some large sell-side studies indicate that mid-cap stocks or specific sectors have at times outperformed small caps during early easing phases, suggesting the historical small-cap advantage is not guaranteed and that Woods' broad call may oversimplify the opportunity set.
Report an Issue
Found something wrong with this article? Let us know and we'll look into it.