Rotation Out of Mega-Cap U.S. Stocks Could Provide Tailwind for Cryptocurrencies, Marex Solutions Says

• Wall Street investors are piling into small-cap stocks and exiting mega-caps on signs of cooling inflation and strengthening Fed rate-cut bets.
• The sector rotation could potentially lead to more capital deployment in the crypto market, according to Marex Solutions' Ilan Solot

Wall Street's pivot to shares in small-cap companies at the expense of mega caps could fuel gains in the crypto market, Marex Solutions told CoinDesk Wednesday.

Since July 8, Nasdaq, Wall Street's tech-heavy index of 100 shares, including the so-called magnificent seven (Mag 7) of Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla, has traded little changed around 2,270 points. Meanwhile, the Russell 2000, a small-cap index, has surged more than 12%, according to the charting platform TradingView.

It's a sign investors are pulling money out of the largest tech firms and dumping it into smaller companies which, until recently, lagged behind the broader market. The Wall Street Journal attributes the newfound love for small caps to cooling inflation and strengthening confidence that the Federal Reserve will reduce the benchmark borrowing cost this year.

The sector rotation could be the most important macroeconomic factor for cryptocurrencies, according to Ilan Solot, senior global strategist at Marex Solutions, a division of global financial platform Marex specializing in creating and distributing customized derivatives products.

"As the steam comes off the Mag 7, money will look for other places to deploy. Small caps are the knee-jerk reaction, but I suspect crypto will benefit from this rotation," Solot said in an interview.

Solot's perspective contrasts with the crypto market's widely held perception that trends in Nasdaq alone determine the valuations of digital assets.

Institutions and traditional investors could have already started allocating money to crypto, as evidenced by the renewed demand for the U.S.-listed spot bitcoin BTC$89,615.20 exchange-traded funds (ETFs). The 11 funds recorded a cumulative net inflow of $422.5 million on Tuesday, the highest tally in six weeks. The total inflow for the past three days has been over $1 billion.

According to Solot, the sector rotation may be particularly favorable for Ethereum's native token, ether ETH$3,041.84, and the impending debut of spot ETH ETFs.

"ETH ETF might land the perfect timing as the AI tech investors look for alternative themes," Solot said.