A powerful market signal is the "quad count," or the forecasted sequence of economic regimes. A progression from Quad 4 (recession fears) to Quad 3 and then to Quads 2 and 1 creates a powerful contrarian setup. This allows investors to buy assets like small caps when recession probabilities are priced at their highest.

Historically, small-cap companies grew earnings faster than large-caps, earning a valuation premium. Since the pandemic, this has flipped. Large-caps have seen astronomical earnings growth while small-caps have lagged, creating a rare valuation discount and a potential mean reversion opportunity for investors.

Small firms can outmaneuver large corporations in the AI era by embracing rapid, low-cost experimentation. While enterprises spend millions on specialized PhDs for single use cases, agile companies constantly test new models, learn from failures, and deploy what works to dominate their market.

A multi-year "rolling recession," which affected different sectors sequentially, concluded in April, quietly kicking off a new bull market. This recovery is not yet obvious because many parts of the economy still lag, which presents a significant investment opportunity.

Due to economic distortions from the COVID cycle and data lags from government shutdowns, the Fed is slower than normal to ease policy despite a weakening labor market. This delay has held back the typical market broadening, creating the specific backdrop needed for small caps to outperform large caps for the first time since 2021.

With the Federal Reserve signaling a market backstop, capital is flowing from concentrated large-cap tech winners into more cyclical, under-loved small-cap stocks (IWM). This support de-risks 'Main Street' sectors and signals a potential broadening of the market rally.

Investors should wait for two specific triggers before increasing small-cap stock exposure. The first is the Fed Funds rate falling below the 2-year Treasury yield. The second is a clear upturn in the relative earnings revision breadth of small-cap versus large-cap companies.

Following a dovish Fed meeting, the outperformance of small-cap stocks (IWM ETF) versus large-cap tech is the key signal of a healthy, broadening market rally. This indicates capital is flowing beyond mega-cap names into the wider economy, confirming a "game on" sentiment for risk assets.

A sharp, V-shaped rebound in corporate earnings revision breadth is a powerful but uncommon leading indicator. It suggests the private economy is decisively exiting an earnings recession and shifting into an early-cycle recovery, often before traditional economic data confirms the trend.