IWM ETF

Recently, the overall economic situation has changed significantly due to updates in the Fed's dot plot and expectations for more interest rate cuts. A more aggressive interest rate forecast might create more challenges for IWM compared to SPY. However, the current valuation gap between IWM and SPY is quite large, which helps to balance out the potential risks.

The iShares Russell 2000 ETF (IWM) fell sharply after the Federal Reserve announced a very aggressive interest rate decision. It dropped more than 3%, hitting a low of $218, which is its lowest point since November 5.

Join CNBC's Melissa Lee and the Fast Money traders for the last trades of the day.

Trump's potential reelection and his support for business are likely to enhance the mergers and acquisitions market, which would help Russell 2000 companies. Currently, the Russell 2000 is trading at a lower price-to-earnings ratio compared to its historical average, making it the only US index that is significantly undervalued. The iShares Russell 2000 ETF provides excellent diversification and is a good option for investing in the growth of small American businesses.

The outlook for Wall Street in 2025 shows differing opinions. Investment firm Stifel predicts a tough year because of economic challenges and inflation, while other analysts are more hopeful.

Small cap stocks, as shown by the iShares Russell 2000 ETF, have had good returns, but they also face major risks and difficulties as we approach 2025. The IWM ETF has a varied sector allocation, with no one stock taking over, but it doesn't seem as attractive for the long term because it hasn't performed as well as large cap stocks. While the valuation metrics for IWM look fair, market feelings and technical analysis indicate that it may not do much better than before.

Join CNBC's Melissa Lee and the Fast Money traders for the last trades of the day.

Amy Zhang, the Executive Vice President and Portfolio Manager at Alger, talks about the advantages of investing in mid-cap stocks, which have historically performed better than the S&P 500 and the Russell 2000 small-cap index. She believes that investors are entering a promising period for small and mid-cap stocks over the next one to five years. Zhang identifies Vertiv as a strong choice for growth in 2025, driven by rising demand for artificial intelligence, and describes AppLovin as a high-quality company with great potential for expansion.

Investors have three reasons to stay optimistic about stocks as the year comes to a close: strong market momentum, increasing market participation, and a supportive Federal Reserve.