The Fed is behind its usual schedule for easing policy due to data delays and COVID-era distortions. This has suppressed the typical market rotation but means the eventual dovish policy will likely be stronger than expected, creating significant upside for early-cycle investments.

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.

The Federal Reserve bases policy on official government labor data, which lags real-time private sector data that markets already reflect. This delay causes the Fed to 'drag its feet' on necessary policy changes like rate cuts, creating a predictable tension and period of volatility that astute investors can navigate.

The market is interpreting stable economic growth paired with only modest Federal Reserve rate cuts as a clear signal to maintain leadership in high-quality stocks. A broad rotation into deep cyclical and small-cap stocks is unlikely until the Fed becomes more aggressively dovish.

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.

Current market weakness, driven by a Federal Reserve that is moving too slowly, presents a strategic buying opportunity. Investors should reposition into sectors that have lagged for years, such as small/mid-cap stocks and consumer discretionary goods, as they stand to benefit most when the Fed inevitably takes more aggressive action.

Despite strong Q3 revenue surprises suggesting a recovery, the Federal Reserve's reluctance to cut rates aggressively is preventing a market expansion into smaller-cap and lower-quality cyclical stocks. The market needs a clearer dovish signal before this rotation can occur.