Stocks closed mostly higher yesterday, except for the small-cap Russell 2000. But the S&P and Nasdaq hit new all-time highs.

Even though the next interest rate hike has been called into question after the latest PCE report showed inflation easing, and the weaker-than-expected (but still good enough) jobs report showed the labor market is not overheating -- the lingering prospect that another hike could still be coming has taken its toll on small-caps.

Interestingly, it was the small-caps that were leading the market earlier in the year, soaring by more than 20% while the big 3 indexes trailed. The small-cap Russell is still up. In fact it's neck and neck with the S&P 500, which are both up 14%+. But the Russell at one point was even beating the tech-heavy Nasdaq by 5+ points. Yet now they trail the Nasdaq by nearly that. (The Nasdaq YTD is up 18.75%).

Small-caps are more interest rate sensitive than their larger counterparts as they often carry more debt, with more floating or near-dated obligations.

As such, more than half of small-caps are off more than 20% from their summer highs. And short-interest is at record levels.

But that tells me the pullback is nearing its end. Especially as the tightening cycle looks like it could come to a quicker end than expected, even from just a few short weeks ago.

In fact, shortly after the FOMC Announcement, the expectation for another rate hike at the October meeting spiked to nearly 70%. But a few weeks later, those odds flipped, with now a 77% probability that there won't be a hike at the next Fed meeting later this month.

We will see how this plays out. But when yields finally begin to ease and when the market looks like it's more likely to be in pause-mode vs. tightening, I would expect the small-caps to regain their leadership mojo. (Actually, even before then as the market is forward looking. And that's why I'm expecting the comeback to arrive sooner rather than later.)

The Nasdaq and the S&P, however, are not feeling that pinch. Quite the opposite. They both hit new all-time highs yesterday.

But soon, I expect all the indexes will see good times as Q3 earnings season is only 2 weeks away. And since stocks typically go up during earnings season ? and the EPS growth forecast suggests another stellar earnings season, I'm expecting stocks to gain plenty and follow through into the end of the year.

In the meantime, the market will be awaiting this afternoon's FOMC Minutes. But given the unanimous vote to raise last month, and the release of the quarterly SEP (Summary of Economic Projections), I can't imagine there'll be any surprises in today's Minutes. But you never know.

With the market in record territory, and momentum on the market's side, we'll see if they can build on those gains again today.

See you tomorrow,