IWM and VOO have hit record highs: What next for S&P 500 and Russell 2000 ETFs?

The Vanguard S&P 500 ETF (VOO) and the iShares Russell 200 Index Fund IWM have jumped to their record highs this year. IWM has jumped by over 21% this year, while VOO is up by 12.50% in the same period. This article highlights some of the top reasons why these ETFs may continue rising this year.

VOO and IWM ETFs YTD performance | Source: TradingView

US corporate earnings growth is still strong

The main catalyst for US stocks is that their earnings growth is accelerating, helped by the artificial intelligence boom, tariff refunds, and energy prices.

A recent report by FactSet shows that nearly all companies in the S&P 500 Index have published their second-quarter earnings. The earnings growth in this period stood at over 50%, much higher than what analysts were expecting. This growth was the fastest one since 2021.

Most importantly, many companies have boosted their forward guidance, a sign that they expect the earnings momentum to continue. 

This earnings growth is coming at a difficult time as the US-Iran war continues, and Iran has hinted that it will escalate to push the US to make an agreement. The war has led to higher inflation in the US, with the headline and core CPI metrics remaining above the 2% target level.

There are also signs that the US economy is slowing. The US lost 23,000 jobs last month, while retail sales have slowed substantially. These numbers show a big disconnect between the real economy and Wall Street.

Odds of a Fed hike are falling

The VOO and IWM ETFs may also benefit from the actions of the Federal Reserve. For most part of the year, the consensus was that the Fed would hike interest rates later this year.

Now, however, the situation has changed, and traders are paring back their Fed hike expectations. Polymarket data shows that odds that the Fed will hike rates have dropped below 50%.

Historically, stocks, especially small-cap ones, underperform when the Fed is hiking interest rates. A good example of this is what happened in 2022 when the Fed hiked rates after the Covid pandemic.

US money market fund inflows have soared

Meanwhile, money market funds have seen a surge in inflows this year as their yields jump. Data shows that the amount jumped to $8.28 trillion in the first quarter, and the trend has likely continued. 

In most cases, money market fund investors often rotate back to the stock market when its bull run continues. This normally happens because, historically, stock market returns tend to be strong than cash. 

VOO and IWM ETFs are undervalued

Despite the ongoing bull run, US stocks are trading at bargain prices. FactSet data shows that the S&P 500 Index trades at a forward 12-month price-to-earnings ratio of 20, slightly higher than its five and ten-year averages. Some of the top companies in the fund like Nvidia and Micron, are all trading at bargain levels.

The same is true with the IWM ETF, which has a price-to-earnings ratio of 19, also lower than its historical averages. As such, there is a likelihood that bargain hunters will continue buying these stocks in the near term.

These metrics explain why top analysts are boosting their estimates for the S&P 500 Index. In a statement on Monday, Evercore analysts boosted their S&P 500 forecast to 9,000 points. Other top analysts from companies like Oppenheimer and Goldman Sachs have also boosted their forecasts this year.