Recently, the focus in the U.S. stock market is shifting from the "Magnificent Seven" tech stocks to small-cap stocks. The S&P SmallCap 600 Index and Russell 2000 Index have risen 6% and 7% respectively over the past three months. While still trailing the nearly 9% gain in the Nasdaq 100 Index, small-cap stocks are poised for greater momentum as the Federal Reserve is expected to cut rates next month.

Francis Gannon, Co-Chief Investment Officer at Royce Investment Partners, stated in an interview that "the breadth of the market rally is expanding, and investors must recognize this." Gannon believes that value-oriented small-cap stocks will benefit the most from rate cuts. Since small-cap companies typically carry more floating-rate debt compared to large enterprises, rate cuts have a more direct impact on their financing costs. Additionally, the stimulus and tax reduction measures provided by the recently passed congressional legislation could further boost small-cap company performance.

Regarding specific targets, Gannon favors investment bank Evercore, believing the company can continue to benefit from the IPO market recovery. He also likes industrial companies, including welding equipment manufacturer ESAB Corp (ESAB.US) and air conditioning equipment producer AAON (AAON.US). In the consumer sector, his team holds outdoor gear brand Yeti Holdings (YETI.US) and automotive parts retailer Advance Auto Parts (AAP.US).

Bank of America's strategy team holds similar views. The bank's equity and quantitative strategist Jill Carey Hall noted in her latest report that rate cuts could deliver stronger short-term small-cap outperformance than historical patterns, as they are more sensitive to interest rate changes. Hall emphasized that during Federal Reserve easing cycles, small-cap value styles tend to outperform growth styles, with high-quality names outperforming high-risk companies.

Bank of America's screening shows multiple consumer discretionary stocks on the preferred list, including homebuilders Meritage Homes (MTH.US) and Taylor Morrison Home (TMHC.US), as well as automotive-related companies Visteon (VC.US), Asbury Automotive (ABG.US), and Group 1 Automotive (GPI.US). Meanwhile, school bus manufacturer Blue Bird (BLBD.US) and truck dealer Rush Enterprises (RUSHA.US) among other industrial stocks also stand out.

Valuation advantages represent another highlight of small-cap stocks. The S&P 600 Index currently trades at approximately 17 times earnings, nearly 30% below the S&P 500 level, while historically the discount has typically been only 25%. "If you dig deep, you can still find value," said James Ragan, Director of Investment Research at D.A. Davidson Wealth Management. He noted that the Russell 2000 has higher weightings in financials, industrials, and healthcare sectors, which still offer investment appeal.

Market participants generally believe that beyond the "Magnificent Seven" tech stocks, Broadcom (AVGO.US) and Palantir (PLTR.US), small-cap stocks are becoming the new investment stage. As the Federal Reserve's September meeting approaches, if rate cuts materialize, the small-cap "counterattack" is expected to accelerate further.