The Russell 2000 Index surged to its most robust performance since November 2022 on Thursday thanks to a surprise decline in US inflation rates.
The index, which measures the performance of approximately 2,000 small-cap stocks in the US, finished nearly 4.5% higher, outpacing the 2% gains in the S&P indices.
The dramatic jump was driven by the latest Consumer Price Index (CPI) numbers, which rose 3.2% for the 12 months ending in October, down from 3.7% in September, exceeding Wall Street analysts' expectations.
The slowdown in inflation – mainly due to a decrease in gas prices – sparked speculation that the Federal Reserve might consider cutting interest rates in mid-2024, with analysts anticipating four rate cuts by the end of next year, bringing rates down to 4.25% to 4.5%.
But despite the optimism, concerns about elevated core prices persist, and factors like increased oil prices, OPEC+ supply restrictions, and ongoing labor market tightness are expected to keep inflation elevated.
That feeds into skepticism surrounding the sustainability of the Russell 2000's rally. Over 30% of the index's stocks are unprofitable, leaving them exposed to looming recession risks.
Despite this, Bank of America analysts remain optimistic, forecasting a 12% annualized price return for the Russell 2000 over the next decade, even amid concerns about economic slowdowns, inflationary pressures, and potential Federal Reserve interest rate hikes.
The Dow closed Tuesday up 490 points, 1.4%, at 34,828, the Nasdaq Composite added 327 points, 2.4%, to 14,094 and the S&P 500 improved 84 points, 1.9%, to 4,496. The small-cap Russell 2000 index gained 93 points, 5.4%, to 1,798.