After a turbulent first half of 2025, the U.S. equity landscape is showing signs of a reversal, not just in sentiment, but in leadership. Wall Street’s top trading desks are making a contrarian call: buy into the year’s underperformers. 

From small-cap names and tech hardware to debt-laden consumer stocks, what lagged during the last upswing could now be primed for a short-term sprint. As market volatility subsides amid a temporary trade détente, traders are preparing for a catch-up phase driven by positioning imbalances and mechanical flows. 

Ivan Stosic, senior market strategist at Horizon28, explores the reasoning behind this pivot—and the delicate line between tactical opportunity and structural fragility.

From Underdogs to Outliers: Where the Action May Shift

Both Citigroup and JPMorgan have spotlighted small caps, technology hardware, and homebuilders as ripe for rotation. These sectors have trailed the S&P 500 in recent weeks, weighed down by fears of higher interest rates and margin compression. But in a market where major indexes have now fully erased year-to-date losses, traders who missed the move are now looking to play catch-up.

According to strategists from Citigroup, systematic traders and discretionary investors—many of whom were underweight during the rebound—are flush with capital and likely to reallocate toward lagging sectors.

“There will be significant buying from those who feel left behind,” one equity strategist explained. “And that urgency to re-engage often favors the most beaten-down names.”

The Mechanics Behind the Momentum: Short Squeezes and CTA Flows

One of the strongest arguments for a continued short-term rally lies in positioning mechanics, not fundamentals. As commodity trading advisers (CTAs) recently reduced their equity exposure, the recent breakout in the S&P 500 clears a path for them to re-enter as momentum builds.

In parallel, short squeezes are creating their own feedback loops. JPMorgan’s trading desk sees potential for consumer discretionary and retail stocks—sectors hit hardest by early-year weakness—to stage quick reversals as short sellers are forced to buy back positions.

A JPMorgan note highlighted that “small- and mid-cap names could outperform in the near term, simply as a function of technical rebalancing and trader psychology, not necessarily macro strength.”

Signs of Rotation: Weak Balance Sheets, Strong Gains

Interestingly, one of the most telling market indicators may be found in Goldman Sachs’ Weak Balance Sheet Index, which tracks 50 of the most heavily indebted companies. This index has outperformed the S&P 500 in seven of the past eight trading sessions, a sign that risk appetite is broadening beyond quality names.

Such moves suggest that valuation discounts and oversold conditions are becoming more attractive to short-term players, even if long-term fundamentals remain questionable.

Citigroup’s team recommends upside exposure to stocks that were hit hard following the April 2 tariff escalation, including consumer durables and tech manufacturers with fragile financials.

The Valuation Gap: Fuel for the Rebound or a Warning Sign?

From a pure valuation standpoint, the gap between high-quality stocks and economically sensitive or balance-sheet-challenged firms has widened. According to independent analysts, this spread offers ample room for laggards to rally in relative terms, even without earnings growth.

One market research firm pointed out that small caps, more sensitive to trade costs and domestic inflation, had taken the brunt of punitive tariff fallout. But now, as the 90-day tariff truce eases short-term fears, these same names could offer high beta exposure for tactical traders.

Skepticism Persists Among Long-Term Investors

Despite the bullish case for short-term gains, long-term asset managers remain wary. Elevated interest rates, slow GDP projections, and potential for renewed trade tensions all weigh heavily on the outlook for small-cap and high-debt companies.

Some portfolio managers argue that the recent bounce is being fueled by technical flows rather than fundamental conviction, making it risky for longer-term capital.

“We’re still not out of the woods,” one senior fund manager said. “This rotation might work over a few weeks, but it doesn’t align with a long-horizon risk framework.”

Political Uncertainty Lingers Over Market Optimism

Even with the recent reprieve in tariffs, investors are well aware that the current administration’s trade posture is subject to rapid change. Many still recall how earlier policy shifts—such as aggressive tariffs and immigration crackdowns—hurt labor-intensive domestic firms, especially those dependent on low-margin U.S. operations.

The short-term trade relief may create an opening, but any renewed friction could quickly shift sentiment, particularly for small caps with exposure to rising input costs and wage pressures.

Conclusion: Tactical Plays in a Time of Transition

This phase of the market isn’t about finding the strongest companies—it’s about identifying those with the most room to rebound, even if temporarily. For traders with high risk tolerance, laggards like small caps, debt-heavy retailers, and tech hardware could offer the most asymmetric payoff opportunities in the coming weeks.

It’s important to be cautious because short-term opportunities don’t erase long-term vulnerabilities. This rally into laggards may feel rewarding now, but it’s not rooted in strength—it’s rooted in relief.

As sentiment shifts, so too will the sustainability of these plays. Whether this catch-up phase leads to genuine recovery or becomes just another brief rotation will depend on what happens when the trade ceasefire expires—and whether speculative flows can outpace structural realities.