Market Trends & Analysis - Small caps have outperformed large caps (S&P 500 and Russell 1000) over the last seven trading days [1] - Small caps historically perform best relative to large caps from mid-December through early March [4] - The Russell 2000 (small caps) contains approximately 2,000 stocks with a market capitalization under $45 billion [2] - The Russell 1000 includes large and mega-cap stocks with a market capitalization over $10 billion [3] Investment Opportunities & Risks - Small caps are more tied to the US economy and sensitive to interest rates and credit conditions, leading to potentially larger swings [7] - Large caps tend to have global revenue streams and stronger balance sheets, offering more resilience during downturns [8] - Small caps have less concentration risk compared to the S&P 500 or Russell 1000 [8] - Analyst coverage for small-cap stocks is generally lower, requiring more thorough individual research [8] Technical Analysis & Key Levels - The iShares Russell 2000 ETF (IWM) faces a key resistance level at $240, corresponding to the 2400 level on the Russell 2000 index [9] - Holding above the 2400 level for the Russell 2000 is a critical test for a sustained rally [10] - Investors should monitor whether small caps continue to outperform even with typical market pullbacks [10][11]

Core Insights - The article discusses the potential for index ETFs to be a significant part of an investor's portfolio, particularly focusing on small-cap, value, and growth ETFs for 2026 [1] Small-Cap ETFs - There is an increasing belief that small-cap stocks will outperform in 2026, following a period of strong performance over the past six months, despite trailing large-cap stocks previously [2][3] - The Federal Reserve's anticipated rate cuts are expected to benefit small-cap companies more significantly, as lower borrowing costs can stimulate domestic demand [3] Value ETFs - The market has seen growth stocks lead, but there is speculation that 2026 could be the year for value stocks to outperform due to investor nervousness and potential economic benefits from lower rates and tariff reversals [5][6] - Recommended value ETFs include the Vanguard 500 Value ETF and the Schwab U.S. Dividend Equity ETF, which focus on value stocks and companies with strong financials and dividend histories [7] Growth ETFs - Large-cap growth stocks have been dominant in the market, particularly those associated with AI, and this trend may continue as AI technology develops [8] - Key growth ETFs include the Vanguard Growth ETF, Vanguard Mega Cap Growth ETF, and Invesco QQQ ETF, which have shown strong performance relative to the broader market [9] Investment Recommendations - The Vanguard Mega Cap Growth ETF is highlighted as a top choice for 2026, given its concentration in leading AI stocks, which are expected to continue driving market performance [12]

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Market Valuation & Risk - Market valuations are stretched, with the S&P 500 trading at high multiples, indicating investors are paying a premium to enter the market [2] - The S&P 500 index has become top-heavy, heavily influenced by a handful of companies, posing a risk if one of these companies falters [2] Small Cap Opportunities - Equal-weight S&P and small caps are showing signs of outperforming cap-weighted indexes, with the Russell 2000 rallying 9% in August and experiencing its seventh straight weekly gain, the longest rally in 5 years [3] - Small caps have been left behind for years and were significantly impacted during COVID, but lower rates can improve their bottom line due to their higher floating rate debt [5] - Small caps are trading at a discount to large caps, making them attractive as money rotates into new leadership, with falling rates creating a setup for a catch-up trade [6] - IGR, the iShares Core S&P Small-Cap ETF, focuses on profitable companies in the small-cap space [7] Asset Allocation & Investment Strategy - Asset allocation is key, and investments should be tied to the client's overall risk profile [8] - Clients should consider extending their duration to capture higher yields and potential principal appreciation [9] - Over 6 trillion USD is sitting in money market funds, with over 1 trillion USD entering in the past year alone, and as rates come down, investors need to consider where to shift this risk-free yield [9] - Money market funds are at 15% relative to the S&P 500, which is historically about 20% [11]

Market Outlook & Earnings - The market's current rally is partly fueled by expectations of a Federal Reserve rate cut, potentially around 50 basis points [1][3][4] - Q1 and Q2 earnings have exceeded expectations, driving the market to new highs [2] - The market is counting on earnings continuing to make new highs [2] - Technology and communication services account for 40% of the S&P 500 market capitalization and 28% of earnings [7] - Analyst consensus expectations show small caps are showing signs of life [11] Valuation & Potential - The valuation multiple is around 22, which is considered acceptable [3] - A potential "melt-up" scenario could see the price-to-earnings ratio rise to 25, reminiscent of 1999 [5] - If the Fed surprises with a 50 basis point cut, the S&P target could be revised upwards to 7,000 [4][5] - The "impressive 493" (companies outside the Magnificent Seven) also had good earnings and are expected to contribute to market growth [8][9] Risks & Uncertainties - A debt crisis scare, potentially triggered by the government having to refund $500 billion to $1 trillion due to overturned tariffs, could derail a year-end rally [15]

Economic Resilience and Inflation - The economy has shown more resilience than expected, with companies reporting stable conditions during the second quarter [2] - Anticipation of the Federal Reserve's actions in September is noted, with a focus on small-cap performance [3] Small-Cap Market Performance - Small caps have outperformed by approximately 400 to 500 basis points since April 8, largely unrecognized in the broader market [4] - Relative valuations for small caps remain cheaper compared to large caps, with small caps yet to reach new highs since November 2021 [5] Earnings Outlook - Small cap earnings turned positive in the second quarter after two years of negative performance, which is crucial for continued outperformance [6] - Expectations are that small cap earnings may outperform large cap earnings in the third quarter [6] Impact of Interest Rates - A lower interest rate environment would benefit small cap companies, particularly those with variable debt [7] - The anticipation of lower rates is already being factored into the small cap market [7] Capital Expenditure Cycle - The recent legislation allowing 100% depreciation on capital expenditures may signal the start of a capex cycle that benefits small cap companies [8] Focus on Industrial Sector - The focus is on economically sensitive areas, particularly industrials, which are expected to benefit from reshoring and re-industrialization in the U.S. [10][11] Historical Context of Small Caps - The Russell 2000's representation as a percentage of the Russell 3000 was 4.2% at the end of the second quarter, a level not seen since the 1980s [12] AI and Market Broadening - The AI narrative is shifting towards beneficiaries of AI, which may drive broader market participation beyond large caps [14]

Market Trends & Sentiment - Tech sector performance is bifurcated, with Alphabet and Apple leading while the rest of the complex lags, indicating potential dispersion in investor sentiment [1][3][4] - Energy and materials sectors have been leading recently, though their impact is limited due to the large size of the tech sector, suggesting a healthy rotation [3] - Large-cap stocks are favored over small-cap stocks [4] Economic Outlook & Jobs Report - The worst of the economy was likely a couple of months prior, coinciding with tariff uncertainties [12] - A jobs report significantly above or below the estimated 75,000 by 10,000 could trigger a market move [11][12] - A much better than expected jobs report might reduce expectations for future Federal Reserve rate cuts [13] - The Federal Reserve is still expected to cut rates in the coming weeks, but potentially not as many times as anticipated over the next 16 months [13] Market Performance & Seasonality - S&P typically pulls back about 2% on average in September based on the last decade's data, indicating seasonality [6] - After the S&P has been up over 25% over 100 days, the average return after one month is 1%, and after three months is approximately 6% [6] - Historically, three months after a similar market condition, the market has been higher 11 out of 11 times, and a year later, up an average of 13% [7] - The strength seen off the lows is inconsistent with a bear market [8] Bond Market & Credit Conditions - The 30-year yield is up around 5%, the highest in a long time, with long-term yields breaking out [9] - Credit markets are showing virtually no signs of stress, with no warnings in high yield or junk bonds, and credit spreads not broadening out [9][10]

Your next guest says a new record could be coming. Tim Orbanowitz is chief investment strategist at Innovator Capital Management. Tim, good to have you on set. >> Great to be with you, Brian. >> Man, we've been waiting for the small cap breakout for a long time. Hasn't It's happened a little bit, but we're still not at a record high. Should we be bullish? >> I think there are catalysts, Brian. And and if you look at this and take a step back, we we've had this valuation gap, small caps to large caps, for a ...