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Small-cap stocks are taking over the summer stock market as the tech sector slumps.

Tom Lee, co-founder of Fundstrat, known as the "Wall Street God of Calculation," said that if history is a guide, the Russell 2000 index focused on small stocks may rise by 15% or more in August.

The Russell 2000 has already posted big gains throughout July and as of Thursday’s close, had climbed more than 10% this month.

Lee said confidence in the upcoming Federal Reserve rate cuts, expected to start in September, is driving the rebound in small-cap stocks. These companies have more debt loads and will benefit most from lower borrowing costs. In contrast, persistently high interest rates have been cited as one of the reasons for the Russell 2000's poor performance in recent years.

It’s also worth noting that the small-cap index has risen gradually, rather than in a dramatic, unsustainable surge, Lee said, noting that the Russell 2000 has risen 1% in 10 of the past 11 trading days.

“ This has happened nine times since 1979, and even in bear markets we’ve seen 100% gains a few months later, ” he said. “The average 12-month gain in this scenario has been 40%.”

Lee previously predicted that the Russell 2000 rally would last about 10 weeks, starting in August and ultimately reaching a 40% gain. Now he is more specific in his prediction, highlighting August as a particularly notable period of gain.

“Small-cap stocks could see gains of more than 15% in August as they have lagged considerably,” he said. “The past two weeks suggest small-cap stocks could be at the beginning of a significant rally.”

In addition to the rate cut factor, Lee also mentioned the prospects of the upcoming U.S. election, which helped drive the Russell 2000 index higher.

Lee said betting markets are pointing to a possible Trump presidency, and investors may be attracted to small-cap stocks because Trump's policies could boost deregulation, mergers and acquisitions and the development of regional banks.

On the other hand, as the AI craze cools down, Lee believes that investors are turning to investments beyond large-cap stocks , and investors who focus on free cash flow or price-to-earnings ratios will find small-cap stocks more attractive.

However, not everyone shares Lee’s optimism. Despite the Russell 2000’s surge, some on Wall Street are skeptical about the durability of the rally, given the poor earnings, revenue and profit margins of small-cap stocks.

Separately, Barclays questioned the impact of potential rate cuts from the Federal Reserve on small-cap stocks, saying that historically, small-cap stocks have typically performed poorly when monetary policy is first eased.

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