A Small-Stock Index Recently Set a New Record. What's Next for Small Caps?

Core Insights - The Russell 2000 index reached a record high of 2467.70, marking its first closing high since 2021, driven by expectations of lower interest rates following a Federal Reserve announcement of a quarter percentage-point cut and projections for two more cuts by year-end [2][7] Group 1: Small-Cap Performance - Small-cap stocks, defined as companies with market capitalizations between $250 million and $2 billion, have been anticipated to outperform due to lower interest rates, which typically lead to higher profits and reduced financing costs [3][6] - The iShares Russell 2000 ETF (IWM) has outperformed the iShares Russell 1000 ETF (IWB) over the past three months, with returns of 15% compared to approximately 10% for larger companies [5][7] Group 2: Valuations and Earnings Outlook - As of the end of August, small-cap stocks are projected to deliver annualized returns of 8% over the next decade, significantly higher than the less than 1% expected for large-cap stocks, according to a BofA Global Research report [6] - Analysts expect small-cap companies to grow earnings at a faster rate than their large-cap counterparts in the upcoming quarters, indicating a shift from previous trends [6][7]