Societe Generale’s Manish Kabra noted the Russell 2000’s sharp outperformance of the S&P 500. This was the biggest single-day relative gain since Donald Trump’s election victory on November 6 of the previous year.
The move was attributed to Federal Reserve Chair Jerome Powell’s dovish shift. Small-cap companies, which depend more on borrowing, benefit more from lower rates than cash-rich mega-cap firms such as Big Tech.
Market Support From Easier Policy
Kabra mentioned that easier policy should provide overall market support. The liquidity increase is expected to lift stocks, including the “Magnificent Seven”.
Looking ahead, Kabra anticipates that the Federal Reserve’s interest-rate path will be central to equity movements. He expects more than 100 basis points of cuts over the next year.
Given the Fed’s dovish pivot, we should overweight small-cap exposure through derivatives. We can establish bullish positions using call spreads on the Russell 2000 index (IWM), as smaller companies benefit most from lower borrowing costs. August 2025 fund flow data supports this, showing a record $15 billion monthly inflow into small-cap focused funds, the largest shift we’ve seen since the final quarter of 2024.
This environment is ideal for pair trades that capture the relative performance gap between small and large-cap stocks. We can go long Russell 2000 futures (RTY) while simultaneously shorting Nasdaq 100 futures (NQ). This strategy hedges against a general market downturn while isolating the outperformance of rate-sensitive stocks over cash-heavy tech giants, a theme that played out sharply following the election results back on November 6, 2024.
Anticipated Liquidity Driven Upside
While small caps are the focus, the prospect of easier money should provide a broad market lift. The July 2025 CPI report confirmed this outlook, with inflation cooling for the third straight month to 2.8%, making Fed cuts more likely. Therefore, we should also maintain long exposure to the broader market by buying S&P 500 (SPY) call options to capture this anticipated liquidity-driven upside.
The expectation of over 100 basis points in rate cuts over the next year makes interest rate derivatives particularly attractive. We should consider taking long positions in Treasury note futures (ZN) or buying call options on long-duration bond ETFs like TLT. These positions will profit directly as falling interest rates push bond prices higher.
This clear forward guidance from the Fed may also present opportunities to sell volatility on indices that have already priced in the pivot. We saw a similar environment back in late 2019, where Fed easing led to a sustained period of lower volatility and steadily rising equity prices. Selling put options on the S&P 500 allows us to collect premium while expressing a cautiously optimistic view on the market’s direction.
