The major small-cap stock index, the Russell 2000, is losing its savior, Super Micro Computer. Investors should prepare for the index to make its next move -- without Super Micro.
The Russell 2000 is now barely up for the year so far -- just about 0.1% -- after gaining 1% in the first half of 2024, which concluded Friday. Meanwhile, the large-cap S&P 500 has climbed 15% so far.
A major reason the Russell is even in the green is Super Micro Computer. That company began the year with a market capitalization of just over $15 billion and is now worth about $48 billion, with the stock more than doubling. It had become one of the Russell 2000's largest holdings, at more than 1% of the index's total market value, according to DataTrek. It drove almost two percentage points of the index's return in the first half of 2024. Without it, the index would have been in the red in the first six months of the year.
Super Micro makes various technology hardware products. In its quarter ended in December 2023, its sales jumped more than $1 billion from the prior quarter as the company partnered with Nvidia to create data center components that feature artificial intelligence. Now, analysts expect Super Micro's revenue to hit $19.4 billion this year, with growth set to continue in 2025.
The resulting jump in its stock price, though, makes Super Micro's market value too large to remain in the Russell 2000. Each year at the end of June, the index rebalances to ensure its components maintain a relatively low average market cap, which is currently $5 billion. It rebalanced on Friday, June 28, and Super Micro made its exit.
"The Russell 2000 is now more atomized starting off in the second half than it was by the end of Q2," write DataTrek analysts.
Without Super Micro, the heaviest weight in the Russell is now about 0.4% of the entire index. Its third largest holding, for instance, is Abercrombie & Fitch, which has a just over $9 billion market cap. The index's total market value is just over $2 trillion.
The consequences for the index are plentiful.
If the number of high-performing stocks doesn't improve, then the index will falter. Most small-caps have had a rough year, as the main beneficiaries of the artificial-intelligence boom have been large-cap technology firms, like Nvidia and Microsoft. Meanwhile many smaller stocks outside of tech have dipped in the past few months.
That drop has occurred as the market has been worried that the probability of recession will increase, with economic growth slowing and lingering uncertainty that the rate of inflation is still too high for the Federal Reserve to cut interest rates. Analysts may have to cut profit forecasts in an array of industries, such as retail and restaurants.
The Russell 2000 is now less composed of tech stocks and more of the various sectors that are more sensitive to changes in economic demand. After the latest rebalancing, tech's weighting in the index is down to 13.3% from 14.9% -- helping boost the weighting of financials by more than one percentage point to 17.2%. As a result, the index will probably react more to Fed policy changes and economic forecasts.
That dynamic could end up presenting an opportunity for small-cap investors. Fresh employment and inflation data will hit the wires this month, while the Fed makes it next interest-rate decision at the end of the month. Any indication that the Fed is moving closer to rate cuts -- likely supporting economic growth -- should send small-caps stocks higher.
The Russell 2000 would benefit especially, partly because of its hefty position in financials. Lower interest rates would likely mean lenders would see higher loan volumes, and still relatively high long-dated interest rates would support what banks can charge borrowers.
No rate-cut signal from the Fed, however, means that financials -- and the Russell 2000 -- could continue to struggle.
