The Russell 2000 (^RUT) index is set to close the trading week higher as the third quarter earnings season gains momentum. To discuss the sustainability of this small-cap rally, Glenmede vice president of investment strategy Mike Reynolds joins Catalysts.

Reynolds identifies three key catalysts driving small-cap performance: fair valuations, "really rosy earnings prospects," and "favorable exposure to the Fed cutting cycle." Reynolds also notes the market rotation is suitable for small caps and value stocks, stating, "This is a trend that's here to stay."

Discussing valuations, Reynolds explains that while small caps are trading at fair value, large caps are currently positioned in the 75th to 80th percentile range. This valuation differential between the two asset classes suggests additional growth potential for small caps, though much depends on the Federal Reserve's approach to rate cuts.

"Our opinion is that the Fed is going to [bring] rates to the neighborhood of neutral by the mid of 2025," Reynolds tells Yahoo Finance. "This is important for small caps because a larger share of their debt is floating rate, so they're going to be more directly rate sensitive to where the Fed is taking things."

To watch more expert insights and analysis on the latest market action, check out more Catalysts here.

This post was written by Angel Smith