What investors are experiencing is only the beginning of a massive rotation out of megacap technology titans into small-cap stocks, according to Fundstrat Global Advisors co-founder and head of research Tom Lee. Spurred by a Tesla earnings miss and lower-than-expected YouTube advertising revenue from Alphabet, the major stock averages closed Wednesday’s session lower. The S & P 500 and Nasdaq Composite suffered their biggest one-day losses since late 2022, dropping 2.3% and 3.6%, respectively. The small-cap Russell 2000 was a relative outperformer, ending the day down 2.1%. This outperformance has been going on throughout July. The Russell is up 7.2% month to date, while the S & P 500 and Nasdaq have fallen 0.6% and 2.2%, respectively, during that time. To be sure, the Russell 2000 is up just 8% for 2024, while the S & P 500 and Nasdaq are up 13% and 14% for the year. .RUT YTD mountain Russell 2000 YTD chart Lee thinks this will continue for the time being. He pointed to an possible Federal Reserve rate-cutting cycle and the chances of former President Donald Trump being reelected in November. A Trump win would lead to deregulation and boost CEO confidence in M & A activity, ultimately benefiting small-cap names. “There’s a lot of overlap between a Fed cut imminent and a Trump White House and that’s why I think the interplay is positive on small caps,” Lee said on CNBC’s ” Squawk Box ” on Thursday. “I think for the month of August small caps can do something more than 15% even, because they underperformed so dramatically. And the type of move we’ve seen just the last two weeks is something that only happens at the start of a pretty significant advance for small caps.” However, Lee added that he’s still bullish on large-cap names long term, given their growth trajectory, high visibility, fair valuations and return on investment in the artificial intelligence space. He noted that, should Nvidia ‘s earnings surprise to the upside, the market could potentially reverse some of its move out of the mega-cap tech titans. The graphics processing unit manufacturer is due to release its second-quarter results on Aug. 28.