Merrill Lynch has noted that small caps historically outperform in the one, three, six, 12, and 24 months following Fed rate cuts, and the firm's head of portfolio strategy Marci McGregor points out that this pattern has held since 1990.Fed rate cuts affect small caps faster. Smaller companies tend to borrow from banks with short-term loans, while large companies have the ability to issue bonds with much longer durations (6+ years). That means when the Fed cuts rates — like its three consecutive cuts in 202 ...

Core Insights - Investors are currently experiencing significant volatility in Japan's bond market, indicating potential shifts in interest rates and investor sentiment [1] - There is a notable rally in small-cap stocks, suggesting a growing confidence in smaller companies and potential opportunities for higher returns [1] - Prices for natural gas, gold, and silver are surging, reflecting increased demand and possibly inflationary pressures in the market [1]

Core Insights - Growth ETFs are positioned for significant growth, offering diversification and exposure to high-potential stocks, which can limit risk while capitalizing on growth opportunities [1][16] Group 1: Vanguard Russell 2000 ETF - The Vanguard Russell 2000 ETF contains 1,992 holdings, primarily small-cap stocks, which are defined as having a market capitalization of approximately $300 million to $2 billion, providing potential for explosive growth [3][4] - The ETF has achieved an average annual return of 9.18% over the last 10 years, suggesting that a $200 monthly investment could grow to around $209,000 after 25 years [6] - Approximately 20% of the fund is allocated to the industrials sector, ensuring diversification across various industries, which helps mitigate risk [5] Group 2: iShares Future AI and Tech ETF - The iShares Future AI and Tech ETF focuses on companies advancing AI technology, including software and infrastructure, with a total of 48 holdings, making it less diversified but highly targeted [7][8] - Despite its average return of 8.07% over the last five years, the ETF has seen a remarkable 33.77% return in the past 12 months, indicating potential for substantial growth in the AI sector [11] - The fund is considered riskier due to its smaller portfolio and the inherent volatility of the AI sector, as well as being a newer fund launched in 2018 [10] Group 3: Vanguard Information Technology ETF - The Vanguard Information Technology ETF includes 314 stocks from various technology sectors, with top holdings in major companies like Nvidia, Apple, and Microsoft [12][13] - This ETF has delivered a higher-than-average return of 22.18% per year over the last 10 years, suggesting that a $200 monthly investment could accumulate around $1.6 million after 25 years [15] - The ETF provides a balanced approach to tech exposure, focusing on large-cap stocks to help limit risk associated with the volatility of the tech sector [13]

Group 1 - The Federal Reserve's interest rate decision is critical for market stability, with expectations of a 25 basis point cut at each available meeting, which would help manage government debt servicing costs [2][3] - The current economic environment shows a divergence in performance between profitable and unprofitable companies, particularly within the Russell 2000 index, with unprofitable companies outperforming [5] - The ongoing concern of inflation remains, despite not reaching the highs seen in the past few years, which poses a challenge for central bankers in balancing price stability and full employment [6][7] Group 2 - Tariffs are contributing to a one-time price shock in goods, and their impact on consumer prices is significant, with households facing an average cost of $1,000 due to tariffs, while benefiting from tax cuts of approximately $2,000 [8] - The reliance of smaller companies on variable rate debt financing is notable, with 30% of Russell 2000 companies depending on this type of financing, indicating potential vulnerabilities in a changing interest rate environment [4]

Core Insights - The article discusses the performance comparison between the S&P 600 and the Russell 2000, emphasizing the impact of profitability on investment returns [11][28]. - It highlights that the S&P 600, which requires companies to be profitable, has consistently outperformed the Russell 2000, which includes a significant number of unprofitable firms [10][14][28]. Group 1: Performance Comparison - The S&P 600 has shown better performance over various time frames compared to the Russell 2000, with most one-year, five-year, and ten-year rolling returns favoring the S&P 600 [14][19][22]. - Historical data indicates that investing in the S&P 600 for any ten-year period over the past 31 years would yield positive returns [26][28]. - The S&P 600's requirement for positive GAAP earnings contributes to a higher quality of aggregate earnings and cash flow, leading to improved returns [28][30]. Group 2: Investment Strategy - A systematic investment strategy that focuses on high profitability stocks can yield better returns compared to a strategy that includes low or non-profitable stocks [5][11]. - The article suggests that a diversified basket of profitable stocks can provide stable cash flow and high yield, akin to a long-term fixed income investment [7][8]. - The performance of the Russell 2000 is negatively impacted by its higher proportion of unprofitable companies, which dilutes overall returns [10][14].

Core Viewpoint - The Russell 2000 Index, representing small-cap stocks, has experienced a significant rally, with strategists suggesting that this upward trend is just beginning [1][2]. Performance Summary - The Russell 2000 has surged nearly 10% since the end of July, outperforming the S&P 500, which has seen only half that advance [2]. - Analysts predict a potential 20% increase in the Russell 2000 over the next year, compared to an 11% forecast for the S&P 500 [2]. Historical Context - Small-cap stocks have underperformed larger companies since 2020, and despite recent gains, they still lag behind the S&P 500 in 2025 [3]. - The anticipated Federal Reserve rate cuts are expected to lower borrowing costs for Russell 2000 companies, potentially enhancing profit margins [3]. Market Sentiment - The recent market reaction to inflation and employment data has fueled optimism, with the Russell 2000 rising 1.2% in response to favorable economic indicators [4]. - Michael Casper from Bloomberg Intelligence notes that small-cap companies are particularly sensitive to the U.S. economy, and rate cuts could lead to increased support from investors [4]. Analyst Insights - Morgan Stanley's Michael Wilson suggests that Fed rate cuts could initiate a new phase in the bull market, positively impacting small-cap stocks [5]. - Wilson has upgraded small caps to neutral but is awaiting broader earnings revisions before fully committing [5]. Earnings Performance - In the current reporting season, over 60% of Russell 2000 stocks have exceeded earnings estimates, with results beating top-line expectations by an average of 130 basis points [6].