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Federal Reserve Chair Jerome Powell’s Friday speech showed the central bank was increasingly dovish, which can mean good news for small-cap stock performance, according to Tom Lee, head of research at Fundstrat. “The Fed acknowledging that the risks now are tilted to the labor market to be softening … especially because they don’t think that tight labor markets are going to create inflation, that’s a very good sign,” Lee said on CNBC’s “Squawk on the Street” Friday morning. “I think it means we have a dovish Fed again,” Lee added. “That’s kind of a green light for small caps.” Lee’s comments refer to Powell’s Jackson Hole, Wyo., speech , where he indicated that interest rate cuts could be on the table but that the central bank was moving “carefully.” Powell also said that there appears to be a “shift” in the balance of risks between full employment and inflation. Stocks surged following Powell’s statements. Small caps outperformed, with the Russell 2000 jumping nearly 4% and beating the three major U.S. averages. .RUT 1D mountain Russell 2000, 1-day Some sectors within small caps may also have tailwinds on the horizon, Lee said. For one, he said financials should be helped by a decline in mortgage rates. Additionally, he said the closely followed ISM manufacturing index returning to above 50 would bode well for industrials. That move in the index would also bolster the argument that the market leadership will broaden. With Friday’s rally, the Russell 2000 is now up almost 6% year to date. That’s underperforming the broad S & P 500 , which has climbed nearly 10% in 2025.
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