Why small-cap stocks are starting to see earnings growth after best quarter since 2021

Core Insights - Small-cap stocks in the Russell 2000 index are experiencing real earnings growth after a strong performance year, with a 3% price return through September driven by revised earnings expectations [1][3] - Analysts' earnings forecasts for small-cap companies, such as Marcus Corporation, rose at the fastest pace since mid-2022, coinciding with the index reaching an all-time high [2] - Overall, small-cap stocks were up 12.4% in the third quarter, marking their best performance since Q3 2021, with value-oriented small caps outperforming the broad index by 2.5% [3] Market Comparison - The Russell 2000, which includes the smallest 2000 stocks, has historically lagged behind the S&P 500, with the Russell trading above 2,490 while the S&P was above 6,740 [4] - Large-cap stocks in the S&P 500 are trading at P/E ratios over 50% higher than their historical average, while Russell 2000 stocks are only about 7% higher, presenting a discount for investors [5] Impact of Federal Reserve Actions - The Federal Reserve's recent decision to cut rates by a quarter point is beneficial for small-cap stocks, particularly for the 40% of companies that are unprofitable, as it leads to cheaper financing and better margins [6] - Historically, the Russell 2000 has performed well in the first 12 months following Fed rate cuts, with traders currently pricing a 92.5% chance of another quarter-point cut in October, which could further support small-cap stocks [7]