Small-Caps Surge as Trump-Xi Call Looms in Tech Spotlight

Good Morning Investors,

Records across the board as markets validate our sustained bullish stance maintained since the April lows. Thursday's session delivered exactly what we anticipated following Wednesday's Fed pivot: broad-based strength with small-caps leading the charge and technology maintaining momentum. The Russell 2000's breakthrough to fresh all-time highs after nearly four years validates our thesis that this cutting cycle will benefit rate-sensitive sectors disproportionately.

Futures suggest consolidation after Thursday's record-setting performance, with pre-market action relatively muted as markets await the Trump-Xi call scheduled for 9 AM ET. This conversation promises to address multiple flashpoints: the TikTok framework deal, ongoing tariff negotiations, and broader trade relationships that have implications for both technology and manufacturing sectors.

The backdrop remains constructive with Treasury yields showing modest upticks, reflecting confidence in economic durability rather than inflation concerns. The 10-year at 4.125% and 2-year at 3.576% suggest markets are comfortable with the Fed's measured approach while positioning for additional accommodation ahead.

Today's calendar is light on economic data, allowing focus to shift to geopolitical developments and Fed officials' commentary. San Francisco Fed President Mary Daly's scheduled remarks will be particularly scrutinized for insights into the pace of future cuts, especially given her previous advocacy for more aggressive easing to support employment objectives.

Russell 2000's Historic Achievement

Thursday's 2.4% surge in the Russell 2000 ($IWM ( ▲ 0.0% )) to its first record close since November 2021 represents more than technical milestone achievement. This breakout validates our long-held view that smaller companies, with their higher sensitivity to funding costs and domestic economic conditions, would be primary beneficiaries of the Fed's pivot toward accommodation.

The index's seven consecutive weekly gains mark its longest winning streak since late 2020, demonstrating sustained institutional accumulation rather than speculative momentum. This breadth expansion supports our thesis that market leadership is broadening beyond the megacap technology concentration that has dominated recent years.

Nvidia-Intel Alliance Creates Synergies

Nvidia's ($NVDA ( ▲ 1.02% )) $5 billion investment in Intel ($INTC ( ▼ 1.14% )) represents more than capital allocation; it demonstrates strategic positioning for AI infrastructure buildout across enterprise markets. Intel's 23% surge and Nvidia's 3.5% gain reflect market recognition that this partnership addresses critical supply chain dependencies while expanding addressable markets for both companies.

The collaboration provides Nvidia access to Intel's entrenched enterprise relationships while giving Intel credibility in AI-accelerated computing. More importantly, it signals Nvidia's commitment to domestic semiconductor capacity, potentially easing regulatory pressures as the company navigates ongoing China trade tensions.

Geopolitical Positioning Benefits

This partnership carries political implications beyond financial returns. By strengthening domestic semiconductor capabilities, Nvidia enhances its positioning with the Commerce Department and broader Trump administration, potentially mitigating future export restrictions or regulatory scrutiny.

The timing aligns perfectly with this morning's Trump-Xi call, where technology trade policies will likely feature prominently. Nvidia's demonstrated commitment to U.S. manufacturing partnerships provides diplomatic cover while maintaining technological leadership in AI accelerated computing.

Sentiment Reset Supports Upside

AAII bullish sentiment's jump from 28% to 41.7% represents normalization rather than euphoric positioning. While this marks the highest reading since July, the 42.4% bears reading remains well above historical averages, suggesting sentiment reset has room to run without reaching dangerous extremes.

This measured optimism, combined with persistent skepticism, creates the psychological backdrop for sustained advances. Unlike bubble formations where sentiment becomes uniformly euphoric, we're observing gradual confidence rebuilding supported by fundamental improvements rather than speculative excess.

Technical Momentum Accelerates

The S&P 500's ($SPY ( ▲ 0.72% )) clean break above 6,600 to yesterday's 6,632 close validates our raised year-end 6,800 target while supporting longer-term 7,000 objectives by mid-2026. Volume patterns suggest institutional rather than retail driven accumulation, providing sustainable foundation for continued advances.

Nasdaq's ($QQQ ( ▲ 0.89% )) 0.9% gain to fresh records demonstrates technology leadership remains intact even as market breadth expands. This combination of growth leadership with value participation represents optimal conditions for sustained bull market progression.

FedEx Validates Efficiency Focus

FedEx's ($FDX ( ▲ 1.39% )) exceptional quarterly performance, beating both revenue and earnings expectations while raising forward guidance, exemplifies how operational excellence gets rewarded in improving macro environments. The 6.7% earnings beat and 2.7% revenue surprise demonstrate network optimization strategies are generating tangible results.

More significant is management's confidence in raising FY2026 revenue growth guidance to 4-6% versus Street estimates of just 1.2%. This optimism reflects both internal efficiency gains and external demand strength, suggesting logistics sector recovery may be more robust than anticipated.

The 6% volume growth provides direct evidence of economic resilience, particularly in e-commerce and business shipping segments. As rate cuts improve capital availability, expect increased business investment and logistics utilization to accelerate further.

Intel's 23% surge on the Nvidia partnership validates our thesis that AI infrastructure buildout will benefit beyond pure-play names. The market's recognition of strategic partnerships over standalone competition suggests opportunities in semiconductor supply chain beneficiaries.

CrowdStrike's ($CRWD ( ▼ 7.95% )) 12% gain on strong long-term guidance reinforces cybersecurity's position as an AI beneficiary sector. The company's targeting of $10 billion ARR by 2031 demonstrates scalable business models in essential technology infrastructure, supporting our conviction in cyber security positioning.

TikTok Framework Progress

Treasury Secretary Bessent's confirmation that the U.S. and China have reached a "framework" deal for TikTok sets constructive tone for today's presidential conversation. The 9 AM ET call between Trump and Xi promises to determine TikTok's fate while potentially easing broader trade tensions.

This diplomatic progress suggests both sides recognize the economic benefits of de-escalation, potentially removing technology sector overhangs that have persisted since the trade war's intensification. Successful resolution could unlock significant value in companies with China exposure, particularly semiconductor and technology infrastructure names.

Broader Trade Implications

While TikTok resolution captures headlines, broader trade relationship improvements could have more significant economic implications. Any movement toward tariff moderation or technology transfer normalization would benefit manufacturing, technology, and consumer discretionary sectors that have faced China-related headwinds.

The timing coincides with our Fed-driven equity bullishness, potentially creating dual catalysts of easier monetary policy and reduced geopolitical tensions. This combination historically generates strong risk asset performance across multiple sectors.

Mary Daly's Expected Commentary

Today's scheduled remarks from San Francisco Fed President Daly will provide additional insight into cutting cycle pace and rationale. Her previous advocacy for more aggressive easing to support employment suggests potential for dovish messaging that could reinforce market expectations for continued accommodation.

Her recent statements that it's "reasonable" to expect two rate cuts before year-end align with current market pricing, suggesting Fed communications remain consistent with investor expectations. This alignment reduces policy uncertainty while supporting risk asset valuations.

Data Dependency Remains Key

With limited economic data today, focus shifts to next week's PCE release, the Fed's preferred inflation measure. Current readings suggest disinflationary trends remain intact, supporting the case for continued easing despite some recent upticks in certain categories.

The labor market's resilience, evidenced by Thursday's jobless claims decline, provides Fed flexibility to focus on growth support rather than emergency employment measures. This balanced approach supports measured rather than panicked policy responses.

Maintaining Aggressive Targets

Thursday's broad-based strength validates our decision to raise S&P 500 targets to 6,800 for year-end, with 7,000 remaining our mid-2026 objective. The combination of Fed accommodation, operational excellence, and geopolitical progress creates multiple supportive catalysts for continued advancement.

Small-cap outperformance through our Russell 2000 positioning has generated significant alpha, with the index reaching our $245 IWM target. Expect continued relative strength as rate sensitivity and domestic exposure provide ongoing advantages in the current environment.

Friday's Trump-Xi call represents a potential catalyst for geopolitical risk reduction while Fed policy accommodation provides fundamental support for continued equity strength. The combination of improving sentiment, broadening participation, and operational excellence creates multiple reasons for sustained optimism.

My 6,800 year-end S&P 500 target and 7,000 mid-2026 objective reflect this constructive backdrop. Small-cap outperformance should continue as rate sensitivity benefits persist through the cutting cycle, while technology leadership remains intact supported by AI infrastructure investment.

Final Thought

Thursday's record highs across major indices represent more than technical achievement; they validate the fundamental thesis that Fed policy accommodation, combined with operational excellence and reduced geopolitical tensions, creates sustained bull market conditions.

The Russell 2000's breakthrough after four years demonstrates that market leadership is broadening beyond megacap concentration toward companies that benefit most from improved capital availability and domestic economic strength. This expansion supports our confidence in continued advancement.

Today's Trump-Xi call could provide additional catalyst for technology and China-exposed names, while Fed officials' commentary reinforces accommodation expectations. Use any near-term consolidation as opportunity rather than concern - the fundamental backdrop for equity strength continues improving.

Quality companies with operational excellence, rate sensitivity, and secular growth exposure remain positioned for sustained outperformance as monetary and geopolitical conditions align favorably.

Dan Sheehan

[email protected]

This newsletter is for informational purposes only and should not be considered investment advice. Please consult with your financial advisor regarding your specific situation.