Societe Generale’s Manish Kabra highlighted that the Russell 2000 significantly outperformed the S&P 500. This was the largest gain in one day since Donald Trump’s election victory on November 6 of the previous year. This surge is linked to Federal Reserve Chair Jerome Powell’s softer approach. Small-cap companies, which rely more on borrowing, benefit more from lower interest rates than large tech firms that have plenty of cash.

Market Support From Easier Policy

Kabra stated that easier monetary policy should support the overall market. More liquidity is expected to boost stocks, including the “Magnificent Seven.” Looking ahead, Kabra believes that the Federal Reserve’s interest rate decisions will be key for stock movements. He expects more than 100 basis points of cuts in the next year. Given the Fed’s shift to a more dovish stance, we should focus on small-cap exposure using derivatives. We can take bullish positions with call spreads on the Russell 2000 index (IWM) since smaller firms benefit most from lower borrowing costs. Data from August 2025 shows a record $15 billion monthly inflow into small-cap funds, marking the largest change since the last quarter of 2024. This favorable environment is perfect for pair trades that take advantage of the performance gap between small and large-cap stocks. We can buy Russell 2000 futures (RTY) while shorting Nasdaq 100 futures (NQ). This strategy protects against a broad market decline while highlighting the better performance of interest-sensitive stocks compared to tech giants, similar to what’s been observed since the election results on November 6, 2024.

Anticipated Liquidity Driven Upside

While the focus is on small caps, the prospect of easier money should uplift the overall market. The July 2025 CPI report supports this view, as inflation eased for the third consecutive month to 2.8%, making Fed cuts more likely. Therefore, we should also maintain long positions in the broader market by buying S&P 500 (SPY) call options to benefit from this expected market increase driven by liquidity. The prediction of over 100 basis points in rate cuts next year makes interest rate derivatives particularly appealing. We should consider taking long positions in Treasury note futures (ZN) or buying call options on long-duration bond ETFs like TLT. These strategies will gain as falling interest rates push bond prices higher. The Fed’s clear guidance might also provide chances to sell volatility in indices that have already adjusted for this shift. We noticed a similar situation in late 2019, where Fed easing resulted in lower volatility and rising stock prices. Selling put options on the S&P 500 allows us to earn premiums while maintaining a cautiously optimistic outlook on the market. Create your live VT Markets account and start trading now.

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