The Stock Market Is Doing Something Last Seen When the Dot-Com Bubble Popped, and It's Sending a Clear Signal Where to Invest Now

Core Viewpoint - The current stock market has seen significant growth, with the S&P 500 up 91% since October 2022, but concerns are rising about potential bubbles in large-cap stocks driven by AI growth [1][2] Valuation Analysis - The S&P 500 is trading at a forward P/E ratio of approximately 21.9, which is significantly higher than its historical mid-to-high-teens multiples [4] - The S&P 600 small-cap index has a forward P/E of 14.8, indicating a valuation gap of 7.1 points compared to the S&P 500, one of the highest since the dot-com bubble [5] Earnings Growth Expectations - Small-cap stocks have experienced stagnant earnings growth, with a decline in 2023 and flat earnings projected for 2024, while the S&P 500 has seen double-digit annual growth [6] - Analysts predict around 20% earnings growth for small companies in 2026, with only a slight slowdown in 2027, suggesting a potential rebound in small-cap earnings [7] Economic Factors - The Federal Reserve is expected to implement additional rate cuts, which could enhance profits and spending power for smaller companies reliant on floating-rate loans [8] - U.S. small caps are less affected by tariffs and may benefit from a domestic economic recovery, with potential for growth in AI opportunities [9] Investment Strategies - Investors can consider researching individual small-cap stocks, although this requires more effort due to less analyst coverage [10] - Alternatively, investing in ETFs like the iShares Core S&P Small-Cap ETF (IJR) or the Avantis U.S. Small Cap ETF (AVUV) can provide exposure to quality small-cap stocks with lower expense ratios [11][12] - Given the undervaluation of small-cap stocks relative to large-cap stocks, it may be an opportune time to invest in these ETFs [13]