The stock market continues to hover around all-time highs, and I continue to emphasize rotating out of large-cap tech stocks and into faster-growing but less visible small- and mid-cap names. In my view, this relatively underappreciated market segment will be the best bulwark againstWith combined experience of covering technology companies on Wall Street and working in Silicon Valley, and serving as an outside adviser to several seed-round startups, Gary Alexander has exposure to many of the themes shaping ...

Market Performance - Small-cap stocks, represented by the Russell 2000 Index, have underperformed compared to larger peers, with the iShares Russell 2000 ETF (IWM) up about 3.7% this year, while the S&P 500 gained approximately 10%, Nasdaq-100 ETF (QQQ) increased by 13%, and the Dow Jones rose by 5% [1] Economic Indicators - The Consumer Price Index (CPI) rose by 0.2% month-over-month and 2.7% year-over-year, slightly below the Dow Jones forecast of 2.8% annual growth [4] - Core CPI, excluding food and energy, increased by 0.3% in July and 3.1% annually, aligning with monthly expectations but slightly exceeding the yearly forecast of 3% [5] Interest Rates and Small-Cap Stocks - Small-cap companies are more reliant on debt than larger firms, meaning that lower interest rates can significantly reduce their borrowing costs and stimulate domestic growth, which is crucial for their revenue [6] - The probability of a 25 basis points Fed rate cut on September 17 is now at 81%, following the positive inflation data [5] Valuation and Investment Potential - The S&P 500 is trading at five times book value, while the Russell 2000 is at only two times book value, indicating that small-cap stocks are currently undervalued [8] - There is potential for a rotation from mega-cap tech stocks to small caps, as high valuations in tech may lead to a rally in small-cap stocks [7] Business Optimism - The Small Business Optimism Index rose by 1.7 points in July to 100.3, slightly above the long-term average of 98, driven by improved business conditions and optimism about expansion [9] - Despite the positive outlook, there is notable uncertainty, as indicated by an 8-point increase in the uncertainty index, now at 97 [9] Earnings Growth Projections - For the S&P 600 index, Q2 earnings increased by 6.6% year-over-year, with 76% of companies beating EPS estimates and 73.4% exceeding revenue estimates [10] - Q3 earnings for S&P 600 companies are projected to grow by 23.2% on a 3.7% increase in revenues, with overall earnings growth expected to be 10.8% in 2025, 17.5% in 2026, and 11.2% in 2027 [11]