Investors are increasingly bullish on small-cap stocks, driven by optimistic projections for the interest-rate-sensitive segment of the market to thrive as the market approaches the onset of a Federal Reserve rate cut cycle.

July has been a pivotal month, as small caps significantly outperformed large caps, especially in the tech sector, which dominated during the nearly two-year bull market.

The Russell 2000 index has surged nearly 9% month-to-date compared to a 3.6% decline for the tech-heavy Nasdaq 100 as of July 25.

The performance gap of nearly 13 percentage points in favor of the Russell 2000 over tech marks the...