The Russell 2000 (^RUT) is under pressure after seeing a five-day winning streak last week. F.L. Putnam Investment Management Co. chief market strategist and portfolio manager Ellen Hazen joins Catalysts to discuss the state of small caps and the outlook of a rotation as investors eye a September interest rate cut from the Federal Reserve.

"We think that the small-cap rally that we saw last week was quite likely premature," Hazen argues. She notes that while there is a big valuation gap between small- and large-caps, small-cap earnings revisions for the next year keep decreasing while S&P 500 earnings revisions keep increasing, "So what looks like a cheap valuation is not as cheap as it looks," she explains. She encourages investors to pay close attention to earnings and earnings revisions when choosing what companies to have a stake in, and points to areas in telecommunications, financials, and healthcare as good opportunities.

She believes that the Fed won't cut dramatically after the expected cut in September, so while there may be lower interest rates, it will have a "very minor effect" on small caps. Hazen also notes that small caps have higher leverage, "so you want to be more careful about which ones you own." She reiterates that investors should look for increasing earnings estimates as well as low leverage when examining small caps, since they do not have as much cushion as large caps in a slowing economy.

For more expert insight and the latest market action, click here to watch this full episode of Catalysts.

This post was written by Melanie Riehl