The hottest trade in the stock market right now is small caps, which rose again on Tuesday.

Currently, small-cap stocks are experiencing a surge in popularity as they have overtaken megacap technology shares in leading the bull market, with the expectation that interest rate cuts will positively impact their growth.

The benchmark for the group reached its highest level since January 2022 on Monday. If the index gains another 1% on Tuesday, it will be the fifth time since 1979 that it has had a five-day streak of gains north of 1%, according to Bespoke Investment Group.

The ETF, which tracks the index, was up about 1% in premarket trading Tuesday. The ETF has gained 9% over the last month, nearly triple the gains in the S&P 500.

Tom Lee, who has accurately predicted the stock market for several years, stated that the small caps rally could continue for over two months, resulting in significant growth for this group.

"According to Lee, who spoke on CNBC's "Closing Bell: Overtime" on Monday, the move could take approximately 10 weeks and potentially reach up to 40%. However, Lee believes that it is only the beginning."

Market rotation

As inflation data showed a decline last week, investors are shifting their focus to previously overlooked sectors of the market. Small-cap stocks are particularly vulnerable to economic and sentiment shifts, and could benefit significantly from lower interest rates.

The "Trump trade" among investors is gaining traction as the group sees potential benefits from a win by former President Donald Trump in November.

According to Goldman Sachs chief U.S. equity strategist David Kostin, hiking tariffs while lowering taxes and regulation could benefit domestic stocks, particularly small caps, even though Trump does not have specific policy proposals for a second term.

In recent weeks, Trump's odds of winning the election have increased since the June debate with President Biden and the assassination attempt on the weekend.