Episode summary
How AI Speculation Is Fueling the Small-Cap Stock Rally | WSJ’s Take On the Week
The Journal
· · Hosts: Telis Demos, Miriam Gottfried, Aaron Back · Guests: Dan Rasmussen
Summary
The hosts focus first on the coming jobs report and the next CPI release, arguing those data points will be unusually important for the Federal Reserve’s September meeting under Kevin Warsh. Aaron Back says weak jobs and softer inflation would make a September rate hike unlikely, while hotter prints could revive that debate. They then turn to Nvidia’s blowout earnings, which included a claim of 70% revenue growth next fiscal year, and note that the rally is spilling into other AI stocks ahead of Broadcom’s results.
Dan Rasmussen of Verdad Advisers argues that the small-cap rally is being driven less by the classic recovery trade and more by speculative flows into the “venture capital half” of the market. He says tiny, thinly traded stocks can rise sharply on limited inflows, especially in names tied to semiconductors, AI and biotech. He also says biotech’s rebound reflects real scientific progress and M&A, not just AI enthusiasm.
Rasmussen adds that private equity firms are stuck with an exit logjam because they paid about 17 times EBITDA for assets that public small caps trade closer to 10 times EBITDA. On index construction, he prefers the S&P 600 over the Russell 2000 for long-term investors because it filters out unprofitable names, and he says value investing still works better as a relative bet than a standalone style call.
Key takeaways
- Aaron Back says the jobs report and CPI will be decisive for whether a September rate hike stays in play under Kevin Warsh.
- Rasmussen says small-cap gains have come mainly from speculative AI and biotech names rather than the classic quality small-cap cohort.
- Rasmussen argues private equity’s exit problem is valuation, not just a closed IPO market, because buyout assets were priced far above public comparables.
- He prefers the S&P 600 to the Russell 2000 for buy-and-hold investors because it screens out many unprofitable small caps.
- Rasmussen says value has not stopped working in absolute terms; it has merely lagged growth in an AI-led market.
Notable quotes
“We're living through an era of speculative mania around AI. Now, whether it's justified or not, who knows”
“this jobs report is going to be, you know, the most closely watched one that I can remember in a long time, to be honest”
“they said that their their revenue next fiscal year is going to grow 70%”
“There are really uh uh two parts of the small cap universe”
“I think that private equity, the the the inventory of private equity that's today on the books of the private equity firms probably trades at around 17 times EBITDA”
How the episode opens
We're living through an era of speculative mania around AI. Now, whether it's justified or not, who knows? Smarter minds than me can figure that out. But, there is a speculative mania. You know, you have to remember that small stocks are small. They're thinly traded. They don't have much volume. And so, a little bit of inflows can push the stock up a lot.
Hi everyone, it's Miriam. Tellus is out on vacation this week, but we are lucky enough to have his boss, Heard on the Street editor Aaron Back. Welcome to Take on the Week. — Hello, Miriam.
Good to see you. So, today we're going to talk about something that we don't talk about a lot, and that is small cap companies. We spend so much time talking about the biggest companies that are driving the market forward, and we haven't been talking about the little companies.
And we're going to talk about specifically why they have been outperforming why small cap companies have been outperforming large cap companies over the past 12 months. It's a really interesting conversation.
It's an unusual situation cuz they've been underperforming for a long, long time prior to that.
Exactly. It's a It's an unusual situation, and we're going to dig into why that's been happening with our guest Dan Rasmussen of Verdad Advisors. But, before we get to that, I want to talk about what's happening this coming week.
And one of the big things is the jobs report. All eyes are on these reports, especially as the market tries to evaluate what the Federal Reserve is going to do with interest rates. So, Aaron, the jobs report last time was actually like kind of disappointing, right?
Yeah, the last jobs report was a little bit weak.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- ai speculation
- small-cap rally
- fed policy
- nvidia earnings
- private equity exit logjam
Companies and tickers mentioned
- NVDA
- AVGO
- Nvidia
- Broadcom
- Verdad Advisers
Watch the episode
Watch “How AI Speculation Is Fueling the Small-Cap Stock Rally | WSJ’s Take On the Week” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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