US Small Caps: UW on Peaking Macro Tailwinds

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US Small Caps: UW on peaking macro tailwinds - Jun 16

• Back in Sep 2025, we turned more constructive on US small caps. This was due to better macro tailwinds from improving growth and anticipation of lower interest rates (link).
• Today, those same macro tailwinds are peaking and starting to reverse, while the small-cap equity rally is already stretched.
• We recommend going underweight US small caps again.

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• There is also an active LPPL bubble exhaustion signal (i.e. SELL signal) on $IWM. It is present at weekly and daily frequencies.
• When price bubbles or crashes approach exhaustion, a signature wave pattern emerges. We use log periodic power laws (LPPL) to find these patterns of peak euphoria and panic, flagging tactical price reversals.

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Value tailwinds no longer as strong, sector allocation refinement needed - Jun 19

• We previously shifted to overweight value vs growth equities back in October 2025. Back then, there was a rare alignment for value outperformance across market behavior, macro and bottom-up fundamentals.
• Today, these tailwinds have diminished, but have NOT turned into headwinds yet.
• On balance, we would stick with value stocks for now, but investors need to be aware of the upcoming Russell Value Index composition shift, which increases the weight of mega cap tech stocks