America all set for Trump 2.0, here's why the US smallcap index is on fire

Some traders believe that the components of Russell 2000 Index - smaller companies with some having only domestic operations - may benefit from the protectionist posturing by a possible Trump 2.0 administration, which may help them sustain market share and grow business.

The Russell 2000 index futures have hit their highest level in three years, with US traders and investors place their bet on the smallcap space as a 'Trump Trade', in light of Donald Trump's almost certain victory in the US Presidential elections.

The Russell 2000 Index measures the performance of 2,000 smaller companies listed in the US stock market. The gauge of diversified smallcap shares is expected to be a beneficiary of the 'Trump Trade', which is a view that lower taxes, immigration curbs, and higher tariffs can benefit some US sectors and industries.

The US equity rally this year has been marked by an overwhelming gain in the shares of the 'Magnificent Seven', as captured by Nasdaq's 34% rise this year. The Magnificent Seven is a group of high-performing US companies namely, Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla. Bank of America analyst Michael Hartnett had used the name of a popular movie for the first time in 2023 while commenting on the seven companies. In comparison, the Russell 2000 Index has so far this year risen by 12%, and has now nearly equalled the YTD gains of Dow Jones Industrial Average.

Some traders believe that the components of Russell 2000 Index - smaller companies with some having only domestic operations - may benefit from the protectionist posturing by a Trump 2.0 administration, which may help them sustain market share and grow business. The anticipation of greater tariff barriers and any possible steps to move manufacturing back home is adding to the sentiment in these smallcap shares.

“Whether Mr Trump comes to power or Mrs Harris comes to power, America First will remain and may gain more momentum. And, as a consequence of that protectionism will gain further ground in the US,” Ajay Sahai, director-general of the Federation of Indian Export Organisations (FIEO) told Moneycontrol.

Trump’s stated plan to cut down on corporate tax rate to 15% is also expected to be a factor that may make some of the smaller cap companies attractive for traders and investors. Trump has promised to extend tax cuts passed during his first term — set to expire at the end of next year — and also further reduce corporate income taxes.

Some experts are now projecting a year-end rally in US equities, but are cautious on going down the value ladder. "I think we’ll see a Santa Claus rally early, and I would want to buy the S&P index rather than specific stocks. Small caps are rallying now, but I think higher rates can be a headwind for them," Bloomberg News quoted Frank Monkam, senior portfolio manager at Antimo.

Drew Pettit, Director - US Equity and ETF Strategy, Citi Research told CNBC-TV18, that the a Trump win means more investors may explore opportunities outside the US megacap stocks. "We have had a very concentrated US market for the last two years, and the index gains have come from only a few names. A Trump win could help investors move from larger cap to smaller cap shares."

For US stock market investors, a Trump victory is setting the stage for a shift away from the 'concentrated flow patterns', said Pettit, adding that this, in turn, could imply a wider range of US companies and sectors get exposure to international capital.

"The first US trade will be the home country assets. Then, investors will wait for clarity on tariff, before taking emerging market positions," Pettit added.

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