Small cap stocks are the hottest trade in the stock market right now, and they're gaining momentum again on Tuesday.

Small-cap stocks are on the upswing now, as they took the baton from tech megacap stocks last week and led the bull market on hopes that lower interest rates will broaden the economic recovery in their favor.

 

 

The Russell 2000 index, a benchmark for the group, jumped 2 percent Tuesday after hitting its highest level since January 2022 on Monday. If the index rises another 1% on Tuesday, it would be the fifth time since 1979 that the index's five-day gain exceeded 1%, according to Bespoke Investment Group.

 

 

The benchmark small-cap index is up 11% in the past month, nearly triple the gain of the S&P 500.

 

 

Fundstrat's Tom Lee, who has been unmistakably identifying stock market conditions for the past several years, says the rally in the small-cap sector could last more than two months, implying significant growth for this group.

 

 

"We think this move could last about 10 weeks and reach 40%. I think it's just getting started," Lee said Monday.

 

 

Investors rushed into previously unloved corners of the market as inflation data released last week spurred bets that the Federal Reserve may soon cut interest rates and trigger a recession. Small stocks tend to be more sensitive to fluctuations in the economy and market sentiment and could benefit more from a rate cut.

 

 

In addition, the "Trump trade" is gaining momentum among investors, who are seen as a potential beneficiary of former President Donald Trump's victory in November.

 

 

Although Trump does not have detailed policy proposals for a second term, but according to Goldman Sachs chief U.S. equity strategist David Costin, raising tariffs while cutting taxes and regulations could be a boost for domestic equities, including small stocks.

 

 

Market odds on Trump winning the election have risen steadily in recent weeks following his debate with President Joe Biden in June and his rescue from an assassination attempt over the weekend.