The theme in last week’s commentary was that, once again, mega caps are leading the way and smaller stocks are lagging behind. This explains how the S&P 500 (SPY) was making new highs in early October and yet the small caps in the Russell 2000 were actually in the red.

Gladly since then...the script has flipped.

The Russell 2000 has surged by nearly 5% week over week well ahead of the other large cap indices. This is a trend that should continue to play out in 2025 after four straight years of underperformance by small stocks. That trend is not built to last.

We will talk about that and more in today’s commentary.

Market Outlook

Give me a reason to be bearish.

I know its popular to be a “devil’s advocate” and take the opposing side of an argument. But right now, it’s pretty hard to come up with a bearish argument with a straight face.

The US economy continues to expand at a healthy clip. Most experts see another 2 to 3% of growth in the 3rd quarter. And with the Fed adding accommodation to the economy via rate cuts...then it’s hard to imagine a recession unfolding any time soon.

If one want’s to be a stickler they could point out that recent inflation reports have come in higher than expected and that could postpone the Fed’s rate cut intentions. I spoke about that in my previous commentary from earlier this week: Are Rising Bond Rates Bad News for Stocks?

The solution to that from the Fed would be to pause longer on the next rate cut as the current level is still restrictive. That would further lower demand to tamp down inflation.

If it did slow the economy, then that would be all the more reason for the Fed to then speed up the pace of rate cuts which investors would cheer with ample buying.

Meaning we are kind of in a Goldilocks period on the economic front where bad news is good news because it would lead to more Fed accommodation. And as the saying goes “Don’t Fight the Fed”.

Please don’t take the above to mean that we are in a runaway bull market that is only going to go up and up and up.

That was basically the case the past 2 years...but that is pretty typical behavior for a new bull market which bounces with gusto from extreme lows (like we had in October 2022).

Now 2 years later the S&P 500 has rallied over 60% and it’s fair to say that most large cap stocks are fully valued (average PE of nearly 22). There is not much more air in that balloon before value investors start crying about a bubble.

The more rational thing to do is for investors to look beyond the safety of large caps to find more value in the small and mid cap space where the average PE is under 16. Not only is that much more attractive than the pricing of large caps...but is also under the long term average.

The key word here is “rational”. As in reasonable. As in logical.

But in the short run the market can avoid these labels for a long time.

As the famed economist, John Maynard Keynes once said...

“The market can stay irrational longer than you can stay solvent”

So, it is reasonable to assume that investors will seek more value in the year ahead and that will lead them to smaller stocks. Unfortunately, it is also possible that investors keep hitting the “Easy Button” with the usual suspects in the large and mega cap space until they reach bubble proportions.

My investment plan will always seek value. And that has me overweighting my portfolio with smaller stocks. And I can be patient to wait for whenever rationality is restored to stock investment decisions. And when that happens we will beat the stuffing out of the market.

Gladly in the meantime our portfolio is doing impressively well. More details below...

What To Do Next?

Discover my current portfolio of 11 stocks packed to the brim with the outperforming benefits found in our exclusive POWR Ratings model. (Nearly 4X better than the S&P 500 going back to 1999).

All of these hand selected picks are all based on my 44 years of investing experience seeing bull markets...bear markets...and everything between.

And right now this portfolio is beating the stuffing out of the market.

If you are curious to learn more, and want to see my 11 timely stock recommendations, then please click the link below to get started now.

Steve Reitmeister’s Trading Plan & Top 11 Stocks >

Wishing you a world of investment success!

Steve Reitmeister…but everyone calls me Reity (pronounced “Righty”)
CEO, StockNews.com and Editor, Reitmeister Total Return

SPY shares were trading at $583.82 per share on Friday morning, up $1.47 (+0.25%). Year-to-date, SPY has gained 23.99%, versus a % rise in the benchmark S&P 500 index during the same period.

Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks.

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