Benchmark small-cap index is approaching its first ‘golden cross' in 18 months. Here's what history shows will come next.

Small-cap and cyclical stocks are experiencing a significant breakout in July 2025, marking a rotation towards economically sensitive sectors after earlier underperformance against megacap technology. This shift, occurring as the small-cap index approaches its first 'golden cross' in 18 months, is driven by improving risk appetite and a reallocation of capital from crowded AI trades, signaling a potential broadening of market leadership beyond Big Tech.

Analysis

A significant market rotation is emerging in July 2025, characterized by a breakout in small-cap and cyclical stocks, including materials, industrials, and consumer discretionary sectors. This movement marks a distinct shift in leadership away from megacap technology and AI-related names that dominated the first half of the year. The rally in these economically sensitive segments is underpinned by a confluence of factors, including improving investor risk appetite and a capital reallocation out of what the article describes as crowded AI trades. Critically, this breakout is supported by a powerful technical signal, as the benchmark small-cap index is approaching its first 'golden cross' in 18 months, a historically bullish indicator that suggests a potential continuation of this trend and a broadening of market participation for the second half of the year.

Key Decisions for Investors

• Investors should evaluate increasing their allocation to small-cap and cyclical stocks to participate in the ongoing market rotation, potentially trimming over-concentrated positions in megacap technology.
• Monitor the confirmation of the small-cap index 'golden cross' as a key technical signal that could sustain the current bullish momentum in these sectors.
• Given the increased focus on economically sensitive assets, closely track macroeconomic data and fund flow reports to gauge the durability of this renewed risk appetite and the rotation's strength.