Core Insights - Small-cap stocks are showing strong bullish signals, with accelerating earnings, attractive valuations, and expectations of significant interest rate cuts [1][10] Earnings Growth - Small-cap companies have experienced a sharp acceleration in forward earnings growth, with a year-to-date growth of 3.7% projected to continue, outpacing large-cap EPS growth (excluding technology) into 2026 [3][4] - In Q2, small-cap earnings per share grew by 12.1% year-over-year, despite a 5.0% decline in sales, indicating strong operating leverage [4] Valuation Metrics - Small-cap valuations are increasingly attractive, with the Russell 2000 trading at a modest 3.7% premium over the S&P 490 (excluding financials), which is less than half of its 10-year median of 8.2% [5][6] - This valuation gap suggests a significant discount relative to historical norms, providing a margin of safety and potential upside as fundamentals improve [6] Macroeconomic Factors - The anticipated easing of monetary policy, with market participants pricing in nearly three cuts to the Fed Funds Rate by the end of 2025, is seen as a critical catalyst for small-cap growth [7][10] - Small-cap companies typically have higher debt levels, and lower borrowing costs would reduce interest expenses, enhancing profitability and freeing up capital for growth [8] Market Dynamics - The S&P 500 has become increasingly concentrated, with the top 10 stocks accounting for 54% of its market cap gains since January 2021, raising concerns about over-concentration in mega-cap technology stocks [9][10] - The Russell 2000 index has shown positive price action, gaining 7.29% over the last month and 17.51% over the last six months [11]