1. Small Cap rotation is hostage to inflation
2. Rate Volatility - the blind spot in Equity Risk
3. Rising Rate Vol - the Achilles Heel of IBB

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Posted on

September 4, 2025

Written by

Qi Analytics Team

1. Small Cap rotation is hostage to inflation

Last week's MacroVantage highlighted the S&P500's growing negative sensitivity to inflation and easier financial conditions.

That pattern is even more acute for the Russell 2000. IWM sensitivity to 5y US inflation expectations is at record lows; and IWM is noticeably more reliant on benign inflation than either SPY or QQQ.

Rotation tradesinto small caps are popular for a variety of fundamental and positional reasons. Qi observes that to work, we need to see inflation behave. Further hawkish re-pricing of inflation would be a big headwind to R2k performance relative to both Large Caps and Technology.