The optimistic sentiment of a 50 basis point interest rate cut by the Federal Reserve this week has driven small-cap stocks to perform actively. Data shows that it rose 2.47% on Friday. However, the expectation of a 50 basis point rate cut needs to become a reality in order to prevent small-cap stocks from being affected. $iShares Russell 2000 ETF (IWM.US)$ In the early morning of Thursday, the Federal Reserve will announce its interest rate decision for September. The market generally expects it to begin an interest rate cut cycle, but there is still disagreement on whether the cut will be 25 or 50 basis points. Currently, the market estimates the probability of a 50 basis point rate cut by the Federal Reserve this week to be around 61%, higher than last Friday's 50%.

There are several reasons why the market remains optimistic about the performance of small-cap stocks. Lori Calvasina, Managing Director of Global Equity Strategy Research at RBC Capital Markets, said one of the reasons is the consensus expectation for GDP growth in 2024, which has been revised upward to 2.5%. He said, "In recent history, the performance of small-cap stocks has been closely related to above-average economic growth. It seems like we are getting closer to that level in 2024."

Lori Calvasina also stated that the preliminary September Consumer Confidence Index from the University of Michigan has increased compared to the previous month. This is

due to the optimistic sentiment surrounding a 50 basis point interest rate cut by the Federal Reserve this week. Data shows that it rose 2.47% on Friday. However, the expectation of a 50 basis point rate cut needs to become a reality in order to prevent small-cap stocks from being affected.$Russell 2000 Index (.RUT.US)$This is good news for the stock market overall, especially for small cap stocks, which are closely related to consumer confidence trends in the post-pandemic era.

Lori Calvasina also added that the inflow of funds into small cap stocks has not stopped despite the outflow of funds from large cap stocks, indicating that investors are intentionally rotating and trying to suppress valuations. He also pointed out that if the Fed does not cut interest rates by 50 basis points in September, "quick money" may be disappointed and small cap stocks may be hit again in the short term.

BTIG's chief market technical analyst, Jonathan Krinsky, believes that small cap stocks can provide a better risk/reward ratio in the short term compared to large cap stocks. Jonathan Krinsky stated in a report: "If a 50 basis points interest rate cut by the Fed is further confirmed, the rise of small cap stocks should accelerate." He added that if a 50 basis points interest rate cut becomes a reality, $SPDR S&P Oil & Gas Exploration & Production ETF (XOP.US)$Please use your Futubull account to access the feature.$VanEck Gold Miners Equity ETF (GDX.US)$Please use your Futubull account to access the feature.$iShares Silver Trust (SLV.US)$ It is also expected to rise.

In addition, Jonathan Krinsky pointed out,$S&P 500 Index (.SPX.US)$It is only about 1% away from the historical high. "We are likely to see this situation in the early next week, and the strategy will become more difficult after the Federal Open Market Committee (FOMC) meeting."

Jonathan Krinsky pointed out that in 2007, when the Fed started cutting interest rates by 50 basis points, the market recovered from an 11% drop in August and reached a cyclical high in early October. But today's situation is different. Jonathan Krinsky said, "Currently, credit spreads are relatively low. In September 2007, the spread between BBB-rated bonds and Treasury bonds steadily increased for about 6 months, reaching about 170 basis points. Although this spread has slightly widened in August, it has been stable around 130 basis points in the past few weeks."

Jonathan Krinsky predicts that the S&P 500 index will rise above 5700 points in the next one to two weeks, but after the Fed cuts interest rates, "we will evaluate the risk/reward and whether there is a possibility of 'sell-the-fact' situation."

Editor/Rocky