The e-mini Russell 2000 Index has broken historical records, with the 2500 point target within reach.

High-risk stocks have become the focus, and the e-mini Russell 2000 Index is about to see a record close for the first time in three years. This rebound was long overdue and there is a possibility of further upside.

Despite ultimately closing flat, the Russell 2000 came close to its high point in November 2021 at 2,442.74 points last Monday after breaking out last week. It ended November with an 11% increase, outperforming the S&P 500 and Nasdaq Composite Index. The strong economic growth in the USA, reasonable valuations, and rate cut expectations mean the 2500 point milestone for this index is within reach.

Small cap stocks have recently benefited from Trump's election as President, reinforcing the 'America First' ideology. Around 80% of the companies in the Russell 2000 Index derive their revenues from domestic operations, and investor sentiment towards this sector has been boosted by Trump's anti-trade stance and dollar-dominated policies.

The reason for breaking the 2500-point mark comes from a report by Oanda broker on Monday morning, with Kelvin Wong referring to it as a "key mid-term resistance for E-mini Russell 2000 Futures". This level is often seen asTechnical analysisThe psychological barrier in the market usually indicates the expected trend formation.

The driving force supporting the rise of small-cap stock indices seems stronger than the resistance. The Russell 2000 is currently experiencing the third longest period in history without a record closing while the S&P 500 has already set a record close 54 times this year.

The optimistic sentiment also comes from rate cut expectations, which are a crucial factor for small businesses. Due to the high debt characteristics of small businesses, they rely more on low-interest rates to control expenses. According to data from CME Group, the market generally expects the Federal Reserve's benchmark interest rate to fall to a range of 3.75% to 4% by 2025. Morgan Stanley expects rates to drop to a range of 3.5% to 3.75%, while Goldman Sachs predicts a final target range of 3.25% to 3.5%. Deutsche Bank, on the other hand, expects only a 0.25 percentage point rate cut, from the current 4.5%-4.75% to 4.25%-4.5%.

If the rate cut exceeds expectations, small-cap stocks, being more sensitive to rate changes, will outperform the large-cap market. According to UBS analyst Jonathan Golub's Monday report, in the past year, as rate cut expectations increased, profitable companies in the Russell 2000 index averaged a daily return of 0.21%, while non-profitable companies averaged 0.44%. In comparison, the average return for S&P 500 companies was 0.16%.

Although the rate cut expectations for 2025 have not yet materialized, the optimistic sentiment about next year's economic growth is already strong. Forecasters from the Philadelphia Fed survey expect an economic growth rate of 2.2% in 2025, slightly lower than 2.7% in 2024 but still robust. Lower rates and strong economic growth create an ideal environment for small-cap stocks as they are more sensitive to economic conditions.

Investors can also find some comfort in JPMorgan's Monday report, which mentioned that the company still maintains an overweight position in US small and mid-cap stocks, partly due to 'increased demand for the US market and the lack of upside potential in US large-cap stocks at current valuation levels.' Goldman Sachs also expressed a similar view last month.

Currently, the PE ratio of the iShares Russell 2000 ETF is 27.23 times, compared to the iShares S&P 500 Growth ETF with a PE ratio of 28.25 times, the latter primarily investing in large companies.

The iShares Russell 2000 fund has performed well recently, rising 20% this year, although growth-oriented funds have risen 38% and the broad market (measured through the SPDR S&P 500 ETF) has risen 28%. It may perform even better next year.