Core Insights - Small-cap stocks have outperformed large-cap stocks in Q3 2025, with the Russell 2000 Index rising 12.4% compared to an 8.0% gain for the Russell 1000 Index, marking a significant shift in market dynamics [2][3] - Micro-cap stocks showed even stronger performance, with the Russell Microcap Index increasing by 17.0% [3] - The overall U.S. stock market demonstrated resilience, with major indexes reaching new highs, supported by lower interest rates and a robust economy [2][3] Performance Overview - From April 8, 2025, to September 30, 2025, the Russell 2000 gained 39.9%, while the Russell 1000 advanced by 35.2% [7] - The Russell Microcap Index surged by 53.8% during the same period, indicating strong recovery and growth in smaller stocks [8] - For the year-to-date period ending September 30, 2025, the Russell 2000 rose 10.4%, while the Russell 1000 increased by 14.6% [11] Sector Contributions - All 11 sectors within the Russell 2000 contributed positively in Q3 2025, with Industrials, Information Technology, Health Care, and Consumer Discretionary performing particularly well [17][20] - Cyclical sectors outperformed defensive sectors, aligning with expectations in a growing economy [17] Valuation Insights - Small-cap stocks are considered more reasonably valued compared to large-cap stocks, with the Russell 2000's weight in the Russell 3000 Index at 4.4%, significantly below the historical average of 7.6% [21][22] - Valuations for the Russell 2000 remain attractive relative to the Russell 1000, based on the EV/EBIT metric [25][26] Earnings Growth Expectations - Small-cap companies are expected to experience stronger earnings growth compared to large-caps, aided by lower interest rates and recent federal legislation that enhances cash flow [29][30] - The potential for multiple expansion in small-caps is anticipated through the end of 2025 and beyond, as many small-cap firms emerge from a two-year earnings recession [29]