According to CoinDesk, Wall Street investors are increasingly favoring small-cap stocks over mega-cap stocks due to signs of cooling inflation and growing expectations of Federal Reserve rate cuts. This sector rotation could potentially lead to more capital being deployed in the cryptocurrency market, as noted by Ilan Solot, senior global strategist at Marex Solutions.
Since July 8, the Nasdaq, which includes major tech companies like Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla, has remained relatively stable around 2,270 points. In contrast, the Russell 2000, an index of small-cap stocks, has surged by more than 12%. This shift indicates that investors are moving funds from large tech firms to smaller companies, which had previously lagged behind the broader market. The Wall Street Journal attributes this trend to cooling inflation and increased confidence that the Federal Reserve will lower the benchmark borrowing cost this year.
Solot believes this sector rotation could be a significant macroeconomic factor for cryptocurrencies. He suggests that as investors pull back from the largest tech firms, they will seek other investment opportunities, with small caps being the immediate choice. However, he also suspects that the crypto market will benefit from this rotation. This perspective contrasts with the common belief that trends in the Nasdaq alone determine the valuations of digital assets.
There are indications that institutions and traditional investors may already be allocating funds to cryptocurrencies. This is evidenced by the renewed demand for U.S.-listed spot bitcoin exchange-traded funds (ETFs), which recorded a cumulative net inflow of $422.5 million on Tuesday, the highest in six weeks. The total inflow over the past three days has exceeded $1 billion.
Solot also highlighted that the sector rotation might be particularly favorable for Ethereum's native token, ether, and the upcoming debut of spot ETH ETFs. He noted that the timing could be ideal as AI tech investors look for alternative investment themes.