Core Viewpoint - The S&P 500 remains a solid investment option, but there are strategic reasons to consider diversifying into other index funds, particularly small-cap ETFs like the Vanguard S&P Small-Cap 600 ETF and the Vanguard Russell 2000 ETF [1][2]. Group 1: Small-Cap Performance - Small-cap stocks, represented by the Vanguard S&P Small-Cap 600 ETF, have a history of solid performance, with market caps typically between $300 million and $2 billion [4]. - The average market cap of the S&P 500 Large Cap Index is approximately $370 billion, highlighting the significant difference in scale between small-cap and large-cap stocks [5]. - Small companies often have the potential for substantial growth, as evidenced by Kratos Defense & Security Solutions and Hims & Hers Health, which have transitioned to larger indices due to their growth [6]. Group 2: Market Trends and Analysis - Small caps have been underperforming compared to large caps, largely due to the rise of AI, which has significantly benefited larger technology companies [9]. - The current period marks the 15th year of large-cap outperformance, which is notable as the average cycle lasts about 11 years [11]. - Analysts from Bank of America Merrill Lynch suggest that small-cap stocks tend to outperform large caps following Fed interest rate cuts, with small caps recently showing their first quarter of positive year-over-year earnings growth since Q3 2022 [12]. Group 3: Valuation and Future Outlook - The S&P 600's forward-looking price-to-earnings ratio is 15.7, below its long-term average, contrasting with the S&P 500's P/E of 22.6, which is above its historical norm [12]. - A potential shift from expensive large caps to undervalued small caps may occur, driven by market recognition of these dynamics [13]. - Small caps have reported their first quarterly earnings growth since Q3 2022, and projections indicate continued improvement in earnings through at least the end of next year [16].

Core Viewpoint - US stocks experienced a significant rally, with all major indices reaching new record highs following the Federal Reserve's decision to cut interest rates [1] Group 1: Market Performance - The small-cap Russell 2000 index also achieved new peaks, indicating broad market strength alongside larger indices [1]

Group 1: Market Outlook for Small-Cap Stocks - The likelihood of a Fed interest rate cut is increasing, which positions small-cap stocks for a potential comeback as investors rotate into sectors beyond technology [1][6] - The Russell 2000 Index has surged approximately 3.1% since last Friday and is up nearly 8.9% in August, prompting strategists to revise their outlook on small-cap stocks [2] - Analysts and economists are upgrading their views on small-cap stocks, with some moving from less attractive to neutral [3] Group 2: Performance Expectations - The Russell 2000 is expected to outperform large-cap stocks in the near term, with forecasts indicating that small-cap and low-quality stocks may extend gains due to lower rates relieving balance sheet pressures [4] - Small-cap stocks are believed to be well-positioned for gains, supported by a sector rotation away from large tech companies [5] Group 3: Interest Rate Impact - Expectations for a September interest rate cut have risen to 87.2%, up from 75% prior to Powell's speech, with even higher probabilities for cuts in October (93.8%) and December (98.8%) [6][7] - Small-cap stocks, which are heavily dependent on external borrowings, could significantly benefit from lower interest rates, allowing for increased capital availability and cheaper refinancing of existing debt [8] Group 4: Economic Sentiment - Small-cap companies, being more domestically tied, are poised to outperform as the economy improves, with several financial institutions upgrading their S&P 500 forecasts based on resilient earnings and a supportive macro backdrop [9] - The economy is expected to rebound from the current slowdown, with anticipated rate cuts and other fiscal measures potentially accelerating growth to 3% next year [10] Group 5: Investment Options - Investors can consider various ETFs for increased exposure to small-cap stocks, including iShares Core S&P Small-Cap ETF (IJR), iShares Russell 2000 ETF (IWM), Vanguard Small Cap ETF (VB), Schwab U.S. Small-Cap ETF (SCHA), and SPDR Portfolio S&P 600 Small Cap ETF (SPSM) [11] - IWM is noted for its liquidity, while SPSM has the lowest annual fees at 0.03%, making it suitable for long-term investing; IJR has the largest asset base at $85.35 billion, and VB has outperformed others with gains of 1.85% over the past month and 5.06% over the past year [12]