The Federal Reserve is easing monetary policy at a time when corporate earnings are already growing strongly. This rare combination has only occurred once in the last 40 years, in 1998, which was followed by two more years of a powerful bull market run.

Small and mid-cap biotech companies are primarily "capital consumers," making them highly sensitive to interest rates. As the Fed moves toward rate cuts, cheaper capital is expected to unlock significant spending on R&D pipelines and M&A activity, historically making biotech a top-performing sector after the first cut.

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.

Despite conflicting inflation data, the Federal Reserve feels compelled to cut interest rates. With markets pricing in a 96% probability of a cut, failing to do so would trigger a significant stock market shock. This makes managing market expectations a primary driver of the policy decision, potentially overriding pure economic rationale.

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.

In the post-zero-interest-rate era, the “everything rally” driven by liquidity is over. Higher base rates mean companies must demonstrate fundamental strength, not just ride a market wave. This environment rewards active managers who can perform deep credit selection, as weaker credits no longer outperform by default.

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.

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.