In recent days, the market's attention has gradually been drawn to small cap stocks in the United States.

Over the past five trading days, the Russell 2000 Index, which focuses on small cap stocks, has risen nearly 12%, marking its largest increase since April 2020.

In contrast, the Nasdaq 100 index, which has a high proportion of technology stocks, has fallen about 3% since last week and hit its largest single day decline of the year on Wednesday. The S&P 500 index, where major US stocks are concentrated, only rose slightly by 0.2%.

However, when viewed over time, the performance of the Russell 2000 index is still relatively weak.

Since the beginning of this year, investors have remained enthusiastic about investing in technology and large cap stocks. Despite the recent significant increase in the Russell 2000 index, it has only risen by 10.5% so far this year, while the S&P 500 index has risen by 17% and the Nasdaq 100 index has risen by nearly 18% during the same period.

Eric Kuby, Chief Investment Officer of North Star Investment Management, which has long focused on small cap stocks, said, "I think the situation has changed." He expressed hope that last week's rise was just the beginning and believed that small cap stocks could see a significant increase in the coming years.

In the first few months of this year, small cap stocks in the US have been relatively sluggish, so why are they starting to explode now? There are three main reasons.

One reason is that the expectation of the Federal Reserve's September interest rate cut has significantly increased.

The lower than expected inflation data in June and further cooling of the labor market in the United States have boosted expectations that the Federal Reserve will cut interest rates in the coming months, which is a potential boon for small companies facing rising borrowing costs.

Jason Swiatek, head of small and medium-sized stocks at Jennison Associates, said that higher interest rates have been a pressure on small cap stocks. When entering the interest rate cut cycle, it will alleviate some pressure on small businesses.

It is worth noting that the expectation of interest rate cuts pushed the Russell 2000 index up last year. In the second half of last year, the excitement about the prospect of interest rate cuts drove the Russell 2000 index to rise more than 20% from late October to late December 2023, but with the illusion of interest rate cuts shattered, the index continued to decline earlier this year.

The second is that Trump's proposed tariffs and tax policies are also beneficial to small companies, thereby boosting small cap stocks.

Recently, Trump stated in an interview that if he is re elected as the President of the United States, he will strive to lower the corporate tax rate to 15%. If this goal seems difficult to achieve, he will be satisfied with cutting it to 20%. Trump said he will extend the expiring tax cuts. In addition, his plan also includes reducing regulation, curbing large technology companies, and supporting cryptocurrencies.

Last week, after Trump was hit by a bullet, his chances of winning the election also increased. According to data from prediction website Polymarket, the probability of Trump winning the 2024 presidential election has significantly increased from 60% to 71% after the attack.

Third, investors' worries about the AI technology foam also affected the rise of small cap stocks to a certain extent.

In the past year, under the AI boom, several large technology stocks have been rising and have repeatedly reached new highs, which has caused people to worry about the overvaluation of these large cap stocks and that the Internet foam 20 years ago will repeat itself.

According to LSEG data, the total market value of the Russell 2000 Index is $2.7 trillion. And the three giants of the US stock market - Microsoft, Apple, and Nvidia - each have a market value greater than the total market value of the Russell 2000 Index.

Peter Tuz, President of Chase Investment Counsel, believes that the funds overflowing from large cap stocks are enough to cause small cap stocks to rise significantly.

Analysts from Vanda Research say that the influx of funds into small cap stocks has triggered a 'short squeeze', where rising stock prices force bearish investors to close positions and short a particular stock, further driving up the stock price. Vanda Research said, "We believe that retail investors still have room to continue chasing this transaction in the next 1-2 weeks

In addition, a new round of financial reporting season is about to begin, and analysts believe that this may provide more reasons for small cap stocks to rise. According to LSEG data, Russell 2000 Index companies are expected to see a profit growth of around 18% in the second quarter.