Shares of smaller U.S. companies are outpacing a rally in the broader equity market as they draw investors looking to scoop up cheaply valued stocks and those betting the group has already priced in an economic slowdown.

The small-cap Russell 2000 jumped 10.4% in July against a 9.1% gain for the benchmark S&P 500, its biggest percentage-point outperformance on a monthly basis since February. Small caps tend to be more domestically oriented, less profitable and carry a heavier debt load than their larger counterparts, often putting them in the firing line when worries over the economy take hold and markets become volatile. This year was no exception: the Russell 2000 has fallen 16% in 2022 despite July's rebound, compared with the S&P 500’s 13.3% drop, as the Federal Reserve tightened monetary policy faster than expected to fight red-hot inflation and sapped appetite for risk across markets.

The small-cap index is now at its cheapest versus the large- cap Russell 1000 since March 2020, according to Jefferies data, catching the eye of some bargain-hunting investors.