The R2000’s near-term wave count favors a final push to an Apr/May high which should challenge 3000. Aside from the A.I.-induced volatility and vexation, the thing that should most concern small-cap investors is the potential for coincident Banks and Biotechnology leadership. While the R2’s largest industry Capital Goods is leading YTD (up 24% through yesterday and trailing only Energy), small-cap managers tend to be overweight the industry, so no harm, no foul. But Banks are rallying to new all-time highs, making their recent strength increasingly uncomfortable for managers who tend to be underweight. BioPharma, the R2’s second largest industry, are thankfully underperforming YTD, but that appears to be near-term consolidation after the industry’s 4Q25 singular outperformance. What makes our industry rotation grid so concerning is that both Banks and Biotech remain strongly positioned favoring outperformance in areas managers are typically underweight. Add that to what Warsh’s Fed Chair nomination arguably brings in terms of a monetary policy total regime shift toward scarce reserves which would favor lower rates (which will help BioPharma) and a steepening yield curve (which helps Banks), and it’s a recipe for a potentially difficult run for those managers caught offsides.
Special Study I: R2000 Sector/Industry Earnings Weight minus Index Weight – Current vs. Average Difference.
Special Study II: New Tenant Rent index bounces from 2Q25 negative YoY reading but has moved from deflationary to disinflationary.