July marked a significant market rotation, with investors flocking to small-cap stocks anticipating that the Federal Reserve’s expected interest rate cuts would make borrowing cheaper for smaller companies. This strategic pivot led the iShares Russell 2000 ETF (NYSE:IWM) to experience its best monthly performance against the Nasdaq 100, represented by the Invesco QQQ Trust (NASDAQ:QQQ), since April 2002. This month, the Russell 2000 rallied by a robust 9.2%, while the Nasdaq 100 fell by 5%, resulting in a 14% relative outperformance of small caps over tech stocks as of July 30. Chart: Small Caps Sharply Outperformed Tech In July, Notch Strongest Month Since April 2002 Small Caps Set To Beat Big Tech This Year? What Needs to Happen Year-to-date, small caps are nearly flat compared to tech, after effectively closing a wide gap. Over the past 12 years, the Russell 2000 has outperformed the Nasdaq 100 in calendar years only three times: 2013 (+1.3%), 2016 (+13%), and 2022 (+17%). The July rotation could extend further if the Federal Reserve implements expected interest rate cuts. The best-case scenario for small caps involves robust economic growth mitigating recession fears, evidenced ...