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Recent days have seen investors rotate out of large-cap stocks and into small caps, and from momentum companies to laggards. But many on Wall Street remain skeptical that the rotation has legs in the wake of President Donald Trump’s tariff policy. The doubters argue that the stocks with the largest market values are likely to come out on top if Trump’s tariffs, which went into effect earlier this month , ultimately remain in place. The largest companies “have negotiating power” and “their scale allows them to adapt more easily to a changing economic environment,” said Brian Gardner, chief Washington policy strategist at Stifel Financial. “[Small caps] also probably don’t have the ability to negotiate any exemptions. Their ability to pivot from one country to another to maybe arbitrage the tariff risk is probably reduced.” Small-cap stocks have rallied this month as investors rotated out of the market’s largest companies, benefiting partly from a belief that they’re more leveraged to expectations that the Federal Reserve will cut interest rates next month in the wake of the weak July nonfarm payroll report . Due to their greater reliance on outside financing, and the domestic economy, small caps are viewed as beneficiaries of lower rates. Apple, Nvidia, AMD As evidence of the largest companies’ ability to navigate around higher tariffs, Apple CEO Tim Cook recently appeared alongside Trump at the White House to announce that the iPhone maker will boost domestic manufacturing, committing to spend an additional $100 billion in the U.S. over the next four years. The White House last week also confirmed that it’s hashing out the details of a deal with Nvidia and Advanced Micro Devices to allow stepped-up sales of semiconductors to China in exchange for handing over to the federal government a 15% cut. “In many ways, if you get excluded [from tariffs] for your investment in the United States, this is a massive benefit to large-cap companies, because they are going to have the ability to write the check and meet the requirements of the Trump administration, while smaller businesses and small-cap companies just don’t have the economic weight,” said Ed Mills, Washington policy analyst at Raymond James. This could force a rotation back into large-cap stocks and out of small caps, which also occurred in Trump’s first term, Mills said. Between the president’s 2017 inauguration and former President Joe Biden’s inauguration in 2021, the S & P 500 soared about 70%, besting the Russell 2000 index’s roughly 60% gain. “There was a rally in small cap to begin, but large cap was the big winner throughout the presidency,” Mills added. “You have to have to have an economy of scale to be able to be negotiating directly with the Trump administration, so your size is a benefit.” That trend looks poised to repeat itself under this Trump administration despite the latest rotation into small caps. Year to date through Wednesday, the S & P 500 had advanced almost 9%, while the Russell 2000 index had risen less than 2%. Deregulation, economic expansion Although large caps are more “tariff resilient,” small caps may not necessarily end up as losers in Trump’s second term, according to Art Hogan, chief market strategist at B. Riley Wealth Management. In addition to lower rates from the Fed, small caps could also get a helping hand from deregulation and continued resilience in the U.S. economy. “The argument for small caps isn’t just, ‘Hey, interest rates are coming down, and no one cares about [artificial intelligence] anymore.’ It’s more of a, ‘Is it time for the small caps to also participate?'” Hogan told CNBC. “It doesn’t have to be either/or. You can have small caps perform in this environment, and I just don’t think it has to be [to] the detriment of the large caps,” Hogan added. Small caps haven’t kept pace with large caps for about a decade, and the valuation gap between small caps and large caps hasn’t been this wide since 2000, the strategist added. “If you’re looking long term, I wouldn’t sleep on the small caps, but I certainly would tell you that we’re in the early innings of this AI revolution, and obviously that’s going to be [to] the benefit of larger-cap companies,” Hogan said.
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