Recently, the US stock market has been dominated by two forces. One is the 'rate-cut trade' driven by expectations of rate cuts, and the other is the 'Trump trade' driven by expectations of Trump's election victory.

Under the influence of these two forces, the style of the US stock market has changed. Technology stocks, led by the 'Mag 7,' have temporarily slowed down, while small-cap stocks, led by the Russell 2000 index, have rebounded strongly.

However, in recent days, while the large-cap technology stocks continue to decline, small-cap stocks have begun to give back some of their gains, and even the commodity market has fallen across the board, causing the market to doubt whether the rise of small-cap stocks can continue. How will the election and the Fed's decisions further affect the US stock market?

With the boost of interest rate cuts and gradual recovery of profits, small cap stocks are still bullish, and the improvement of market concentration will support the market rise. Considering other factors such as the economy and corporate profits may also disrupt the market, the 'Trump trade' is still uncertain.

Expectations of rate cuts are expected to continue to boost small-cap stocks.

Generally, smaller companies often have higher leverage ratios and are more likely to finance floating rate debt. Therefore, compared to large-cap stocks, small-cap stocks are more sensitive to interest rates.

As last week's inflation data unexpectedly fell, expectations of rate cuts intensified. Market data shows that the Russell 2000 index has risen by 11.5% in the past five trading days, but has since retreated, accumulating a 1.68% increase this week.

However, despite the strong rebound of small-cap stocks, there is still a gap compared with the rise of large-cap stocks. Since the beginning of this year, the S&P 500 has risen by more than 15%, while the Russell 2000 has recorded only a 7.8% increase.

Liz Young Thomas, director of investment strategy at SoFi, believes that although the strong profits of technology stocks in recent quarters have helped large-cap stocks outperform small-cap stocks, considering that the valuation of these technology companies is too high, and small-cap stock earnings are gradually recovering in the latter half of the year, as well as the ongoing boost from expectations of rate cuts, she continues to be bullish on small-cap stocks.

In addition, with the rotation of US stock market sectors, analysts Ed Clissold and Thanh Nguyen at Ned Davis Research found that market breadth indicators have improved significantly in the past week.

Kevin Dempter, an analyst at Renaissance Macro Research, pointed out that this is a positive signal and that the outlook for the next 3-6 months indicates a call, as the breadth should push the duration of the bull market.

After a momentum signal appears, there is usually a short pause. Still, with the easing overbought situation, the call trend should be restored.

'Trump trade' brings uncertainty.

With the final election vote still to come, the outcome of the presidential election is still uncertain.

According to betting market data, the probability of Trump winning has reached a 'cyclical high' of 70%.

Under the 'Trump trade,' the market generally expects that its strong fiscal and monetary policy tendencies will bring stronger fundamental support, especially benefiting the energy, financial, and medical care industries.

The latest news is that Biden is facing pressure from senior Democrats to withdraw, causing the stock market to decline in the past two days.

However, Adam also pointed out that there are still too many variables in the market that prevent investors from betting on the 'Trump trade.' Economic growth, corporate profits, and Fed policies are often more critical than political factors in deciding sector performance.

Adam commented that in the short term, seemingly obvious driving factors may not have a long-term effect, as other factors often mask the role of politics in asset prices.

In summary, the US stock market is influenced by two forces: the 'rate-cut trade' and the 'Trump trade,' and small-cap stocks are expected to continue to be bullish due to expectations of rate cuts. The outcome of the presidential election is uncertain, and the future performance of industries and sectors will depend on various factors such as economic growth and monetary policy.

Given the unpredictability of this election cycle, anything could happen within the next 109 days.

In addition, considering that Trump's policy combination of reducing taxes domestically, increasing tariffs on foreign goods, and limiting immigration may increase inflation risks, this may conflict with the Federal Reserve's loose monetary policy path, bringing more complex effects to the stock market.

Editor/Emily