The iShares Russell 2000 ETF (IWM) has dropped into a technical correction after falling by over 11% from its highest level in 2024. It retreated to $214, its lowest level since September last year, lagging behind its top peers like the S&P 500 and Nasdaq 100 indices. So, will the small cap companies rebound?

Small cap stocks hit by rising bond yields

The iShares Russell 2000 ETF has retreated in line with the ongoing performance of the US and global equity market. Top indices, including the S&P 500, Nasdaq 100, and Dow Jones have pulled back sharply in the last few days. 

Other global equities have also plunged this year, with the Nikkei 225, Hang Seng, DAX 40, and CAC 40 being in a correction. 

These indices have fallen by sharply because of the ongoing sell-off in the bond market that has pushed yields higher. In the United States, the 5-year, 10-year, and 30-year bond yields have all jumped above 4.6%.

These stocks sold off more after the last Federal Reserve meeting in December when officials decided to cut rates by 0.25% and embrace a more hawkish tone. In that meeting, they hinted that they will deliver just two cuts this year, abandoning the aggressive easing stance they had hinted before.

Small cap companies that make up the IWM ETF are usually the most negatively affected in an era of high interest rates. That’’s because many of these companies are smaller firms that are not yet profitable. 

Also, these companies are much different from those in key indices like the Nasdaq 100 and S&P 500 in terms of their balance sheets. Firms like Apple, Microsoft, and Berkshire Hathaway in an era of higher rates because of their huge cash balances, since their idle cash generates higher interest income. 

Small cap companies, on the other hand, often pay more interest than what they receive in form of interest income.

Therefore, the IWM ETF will be in the spotlight as the US releases the upcoming inflation data on Wednesday. Economists expect the data to show that inflation remained at an elevated level in December. Inflation may remain higher this year because of the ongoing Los Angeles fires and the upcoming Trump policies like tariffs and deportations.

Top IWM movers of 2025

Most companies in the iShares Russell 2000 ETF have dropped this year as these risks resin at an elevated level. 

Fubo TV stock has soared by 253% this year after the company announced a merger with Disney’s Hulu + Live TV business. 

The other most popular gainers in the IWM ETF are companies like Plug Power, Luminar Technologies, Beyond, Teekay Tankers, and Stich Fix. As always, many biopharma companies like Sana Biotechnology, Cerence, Inari Medical, and Immune Bio.

On the other hand, quantum stocks have led the IWM ETF crash after top experts like Mark Zuckerberg and Jensen Huang. Companies like Rigetti Computing, D-Wave Quantum, and IonQ have fallen by over 60%. Other top laggards companies like Soundhound, Airship AI, and Jasper Therapeutics have all plunged. 

Russell 2000 index analysis

IWM ETF source by TradingView

The daily chart shows that the IWM ETF peaked at $245 in November last year. It has moved below the 50-day and 100-day Exponential Moving Averages (EMA). The stock moved below the lower side of the ascending channel.

Also, the Percentage Price Oscillator (PPO) and the Relative Strength Index (RSI) have continued falling. It has also moved below the lower side of the ascending channel. Therefore, the index will continue falling, with the next point to watch being the psychological point at $200.

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Asian markets presented a mixed picture on Tuesday, as bargain buying following recent losses was countered by ongoing concerns about the global economic outlook and the potential impact of a second Donald Trump presidency.

The release of US inflation data this week, as well as the start of the corporate earnings season, is adding to the uncertainty in the markets.

Trump’s tariff plans and a weaker dollar

A report suggesting that President-elect Donald Trump’s economic team is considering a more gradual approach to increasing tariffs on imports provided some support to traders and slowed the dollar’s recent surge.

However, despite this development, worries persist that his tax cuts, deregulation, and immigration policies could reignite inflation.

The potential impact of new US export restrictions targeting AI chips to China also seemed to have little immediate impact on the markets.

Traders scale back Fed rate cut expectations

Traders have significantly adjusted their expectations regarding the Federal Reserve’s interest rate policy, reducing the projected number of rate cuts through 2025 to just one, down from four predicted last year.

There’s even discussion that the Fed’s next move could be a rate hike, driven by persistent inflation and the uncertainty surrounding Trump’s policies.

The better-than-expected December jobs report released on Friday dealt another blow to the hopes for a rate cut at the Fed’s next meeting, sending equity markets lower.

Wall Street recovery and mixed Asian performance

Wall Street managed a slight recovery on Monday, with the Dow and S&P ending in positive territory, although tech stocks, including Nvidia, dragged the Nasdaq down again.

Asian markets experienced a volatile trading session on Tuesday morning.

Hong Kong, Shanghai, Sydney, Wellington, Taipei, and Jakarta saw gains, while Singapore, Manila, and Seoul all experienced losses.

Tokyo was the biggest loser as traders returned from a long weekend, catching up with Monday’s sell-off.

Dollar weakens, eyes on inflation and earnings

The dollar retreated against other currencies after Bloomberg reported that members of Trump’s team were considering a gradual increase in tariffs.

This contrasts with Trump’s previous statements that he would impose huge levies on China, Canada, and Mexico as soon as he took office.

Despite the weaker dollar, the pound remained at levels not seen since the end of 2023, and the euro was close to its weakest level since late 2022, with continued concerns that it could return to parity with the dollar.

All eyes are now on the release of US inflation data this week and the start of corporate earnings season.

Earnings and outlook to set tone for 2025

“This earnings season will set the tone for financial stocks in 2025, but the stakes are high,” Charu Chanana, chief investment strategist at Saxo Markets, told Agence France-Presse.

Even with solid fourth-quarter results, the macro backdrop — characterised by lingering inflation concerns, steeper yields, and recalibrated Fed expectations — may weigh on sentiment.

She added that “uncertainty around Fed policy and a potential shift in fiscal priorities under Trump’s new administration will keep markets on edge.”

Chanana noted:

With valuations already elevated after a strong 2024, further stock gains will require more than just decent earnings. Robust outlooks, ongoing loan demand, and resilient consumer credit will be critical to sustaining investor confidence.

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The Schwab US Dividend Equity ETF (SCHD), the Vanguard High Yield Dividend Yield Index Fund (VYM), and the iShares Core Dividend Growth ETF (DGRO) have pulled back in the past few weeks as US bond yields continued rising. 

The SCHD ETF has dropped by 7.3% from its highest level in 2024. Similarly, the DGRO and VYM ETFs have fallen by 5.85% and 5.15% from the same period. These ETFs, together with others that track American equities are bracing for key events that will affect their trajectories this year. 

US inflation data ahead

The most important event that will impact key indices like the SCHD, VYM, and DGRO ETFs will be the upcoming US consumer price index (CPI) data. 

Economists polled by Reuters expect the data to show that the headline CPI rose from 2.7% in November to 2.9% in December. Core inflation, which excludes the volatile food and energy prices, is expected to remain at 3.3%. 

These will be important numbers to watch because of their impact on the Federal Reserve, which has hinted that it will maintain a hawkish tone this year. 

The Federal Reserve’s key concern is inflation, which could tick up this year. First, the ongoing wildfires in California will have an immediate impact as prices of key goods and services rise. There are reports that rents have started rising because of the ongoing demand and supply dynamics. 

Second, Donald Trump’s policies, if implemented, will be highly inflationary. He has pledged to deport illegal immigrants, raise tariffs, and implement substantial tax cuts. Additionally, he has talked about taking the Panama Canal, a key shipping artery that is used by thousands of ships each month. 

Wednesday’s inflation report will have an impact on US government bonds, whose yields have been in a strong uptrend. The 30-year yield is hovering near 5%, while the 10-year has moved to 4.80%.

Higher inflation figures than expected means that the Fed will maintain a more hawkish tone this year. The Fed has hinted that it will deliver two rate cuts this year, while some analysts anticipate that it will not cut after all.

Dividend ETFs like SCHD, VYM, and DGRO often underperform the market when the Fed turns hawkish. 

Corporate earnings season

The other important event that will affect these ETFs are the upcoming earnings season, which starts on Wednesday. Some of the top companies that will release these results are firms like Goldman Sachs, JPMorgan, Blackrock, and Wells Fargo. 

These companies will send the tone of what to expect in the earnings season. The base case is that the fourth-quarter earnings growth stood at 11%, the highest level since 2021. Higher earnings growth will fuel these ETFs this year. 

Donald Trump inauguration

Meanwhile, the SCHD, DGRO, and VYM ETFs will react to Donald Trump’s inauguration next week. 

Trump’s administration will have different policies than Joe Biden’s. The most important policies that may affect stocks are tariffs, which he can implement using executive order. On the positive side, there are reports that he will implement these tariffs gradually. 

The other ambitious parts of his policies will be more difficult to implement since they will need to be passed by Congress. While Republicans control the Senate and the House of Representatives, their margins are thin and passing any ambitious bills will be difficult. 

Some of Trump’s policies like deportations will need billions of dollars, which will need to be passed by Congress. While most Republicans favor deportation, some are concerned about the ballooning public debt. 

Still, stocks may jump as investors remember the surge that happened when he became the president in 2017.

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Chinese officials are reportedly exploring a scenario where Elon Musk could acquire the US operations of TikTok if the short-video app fails to overcome a looming ban in the United States.

While Beijing’s preferred outcome is for TikTok to remain under the ownership of its parent company, ByteDance Ltd., contingency plans are being discussed in anticipation of a potential loss at the US Supreme Court, according to a report in Bloomberg.

Strategic discussions in Beijing amid US legal battles

Although ByteDance is contesting the impending ban with an appeal to the US Supreme Court, the justices signaled during recent arguments that they are likely to uphold the law.

According to Bloomberg, senior Chinese officials have already begun debating contingency plans for TikTok as part of a broader discussion about navigating relations with the incoming Trump administration.

These confidential discussions include the possibility of Musk becoming involved.

Musk’s ties to Trump could facilitate a deal

A high-profile deal with a key ally of President-elect Trump may hold appeal for the Chinese government, which is expected to have a voice in any potential sale of TikTok.

Musk, who has provided over $250 million in support of Trump’s reelection, has been tapped for a prominent role in improving government efficiency after the Republican takes office.

The Chinese government reportedly sees TikTok negotiations as a possible area for reconciliation with the new US administration.

X and TikTok: a potential merger for increased user engagement

One of the scenarios being considered by the Chinese government involves Musk’s X (formerly Twitter) taking control of TikTok’s US operations, potentially running the two businesses together.

The combination of X and TikTok US, with its over 170 million users in the US, could significantly bolster X’s efforts to attract advertisers, as well as possibly benefiting Musk’s AI company, xAI, with access to TikTok’s vast data sets.

While these discussions are underway in Beijing, sources say that no firm consensus has been reached about how to proceed.

The discussions are still considered preliminary and it is also unclear how much ByteDance knows about these government deliberations, or whether TikTok and Musk have had any talks. Both Musk and representatives from ByteDance and TikTok have not responded to requests for comment.

Musk did note on X in April that he believes TikTok should remain available in the US, as banning it would be “contrary to freedom of speech and expression”.

China’s influence and TikTok’s future

These talks in Beijing suggest that TikTok’s fate may no longer be solely in ByteDance’s control, and that the Chinese government expects to face tough negotiations with the Trump administration over a range of issues.

They view the TikTok negotiations as a potential opportunity for mending ties with the new US administration.

The Chinese government also holds a “golden share” in a ByteDance affiliate, which allows them to influence the company’s strategy and operations, while also needing to approve of any sale that includes the valuable recommendation engine.

This is because China’s export rules prevent its companies from selling software algorithms like the one integral to TikTok.

Bloomberg Intelligence analysts estimate the US operations of TikTok could be valued at between $40 billion and $50 billion, which is a considerable sum even for the world’s richest person.

It’s also unclear how Musk would finance such a transaction, if it would involve selling other holdings, or whether the US government would approve of the deal.

Furthermore, spinning off TikTok’s US business would be an extremely complex operation.

Lawyers for TikTok have previously argued that separating the US components of the app would be “extraordinarily difficult.”

Whether a sale of US TikTok would happen through a competitive process or be arranged directly by the government is also uncertain.

Billionaire Frank McCourt and “Shark Tank” investor Kevin O’Leary are also reportedly part of a bid through Project Liberty to acquire TikTok, and have spoken about the deal with Trump. In the past, both Microsoft Corp. and Oracle Corp. have also shown an interest in acquiring the company.

One alternative for TikTok would be to transition existing US customers to a similar app (with different branding), which could potentially circumvent the ban, although the viability of this strategy remains uncertain.

Meanwhile, a person close to the company told Bloomberg, that before the Supreme Court hearing, their legal battle was the primary focus of top executives, and that they would prefer to keep fighting to maintain control, rather than sell TikTok’s US operations.

Musk’s potential role in US-China relations

Musk is uniquely positioned to influence the China-US relationship as the world’s wealthiest person, with business interests that span the world’s two largest economies.

His Tesla factory in Shanghai has established goodwill with Chinese government officials and has helped to grow its market share in China.

Although Trump is filling his administration with China hawks, such as Secretary of State nominee Marco Rubio, Musk has spoken out against some of the trade policies, including tariffs on Chinese EVs.

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The CAC 40 index remained on edge as the euro crashed to near parity and French government bond yields rallied. The index, which tracks the biggest blue-chip companies in France, was trading at €7,400, where it has remained in the past few days. It is down by 10% from its 2024 highs. So, will the CAC 40 index rebound as the euro falls and France bond yields rise?

France bond yields are rising as the euro falls

The CAC 40 index has continued to consolidate as the French and US bond yields keep soaring. Data shows that the 10-year French yield rose to 3.486% this week from the year-to-date low of 2.85% and the pandemic low of minus 0.41%.

The 30-year yield has also risen to near 4%. This trend mirrors what is happening in other countries as the bond rout accelerates. In Germany, the ten-year yield has risen to 2.58%, while in Italy and Spain, that yield is up to 3.82% and 3.30%, respectively. 

The French bond yields have continued rising because of the ongoing budget and politics have led to volatility in the country. Last year, Michel Barnier’s government collapsed after proposing some budget cuts. The finance minister has hinted that the budget deficit will be in the range of 5% and 5.50% this year.

Rising bond yields have an impact on the stock market as many investors move from the equity market to bonds. Indeed, data shows that more people in France are now investing in money market funds.

The CAC 40 index has also wavered as the EUR/USD has continued falling this year. It has dropped to 1.0200, its lowest level since November 2022 and is nearing the parity level of 1.000. 

French companies react differently to the falling euro. Some, like large exporters like LVMH and Renault since it makes their products affordable to their international customers. 

The euro has crashed and the French bond yields have risen as investors watch the next actions by the European Central Bank (ECB). The bank has already delivered four interest rate cuts, and analysts anticipate more this year.

Top gainers and laggards in the CAC index

Most companies in the CAC 40 index have been in the red this year so far. The best-performer in the index is Vivendi, which will go through a four-way split, including the London-listing of Canal+. Havas will be listed Amsterda, while Louis Hachette Group will list in Paris.

The second-best performer is Engie, a leading energy company involved in industries like wind and solar energy, biogas, green hydrogen, and hydropower. Its stock has jumped by 3.78% this year. 

The other top-performers in the CAC 40 index are Safran, Legrand, and TotalEnergies, whose shares have risen by over 2%. On the other hand, the top laggards in the fund are Stellantis, Publicis Groupe, Kering, Michelin, and Pernod Ricard.

CAC 40 index analysis

CAC 40 index chart | Source: TradingView

The weekly chart shows that the CAC 40 index has remained on edge in the past few days. It has remained about 10% below the highest point in 2024. The index has moved slightly below the 50-week and 25-week Exponential Moving Averages (EMA).

Most importantly, the index has formed a symmetrical triangle chart pattern, which is nearing their confluence levels. That is a sign that the index may be about to have a big move in the coming days. A big drop may see it move to the psychological point at €7,000, while a breakout will see it retest the key point at €8,000.

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