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Investing.com -- Hedge funds are increasing their bets against smaller companies following a strong rally, as concerns grow about the U.S. economy’s ability to withstand global trade tensions.
Short positions on the Russell 2000 Index reached $16 billion in July, marking one of the highest levels since 2021, according to Goldman Sachs Group Inc (NYSE:GS).’s trading desk. Net exposure to Russell 2000 futures is near its lowest point in a year, while investor futures bets on the Nasdaq 100 Index remain close to historic highs. The gap between these two metrics has reached its largest ever, Goldman Sachs reports.
Smaller companies typically have weaker balance sheets and less borrowing capacity than S&P 500 firms, making them more vulnerable to economic changes. Despite outperforming large-cap stocks since April lows, some investors doubt that U.S. growth will remain strong enough to support continued gains as President Donald Trump works to reshape global trade relationships.
Small-cap stocks have underperformed larger companies in recent years, as the artificial intelligence boom benefited firms like Nvidia Corp . (NASDAQ:NVDA) Smaller stocks initially gained from the "Trump trade" late last year when investors anticipated that higher trade barriers would increase demand for domestic goods.
These expectations were later undermined by growth concerns and persistent high interest rates, which disproportionately affect small firms due to their dependence on external capital. The Russell 2000 has risen 26% from its April lows, prompting some investors to warn that the rapid rally might indicate overheating risk sentiment.
The bearish outlook on U.S. small caps could be challenged if economic growth stays robust or if moderate inflation strengthens the case for Federal Reserve interest rate cuts. Traders currently anticipate the central bank will reduce borrowing costs as early as September, but more likely in October.
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