SPY Vs. IWM: Why 3.4% GDP Growth Leaves Two Different Tests For Investors

The U.S. expansion reached 78 months through October as third-quarter GDP grew 3.4%, while September real spending stalled. SPY investors face a test of earnings breadth and investment returns; IWM investors must also examine domestic demand, debt repricing and interest coverage.

The Print

The U.S. economic expansion has run for 78 months through October 2026, measured from May 2020, the month after the National Bureau of Economic Research’s last designated trough. NBER has not announced a subsequent peak, although its determinations are retrospective.

Real gross domestic product grew 3.4% annualized in the third quarter, accelerating from 2.2% in the second. September was less convincing: real consumer spending was nearly flat, real disposable income fell 0.3%, and payrolls increased by 29,000.

Those contrasting figures set different tests for the SPDR S&P 500 ETF Trust (NYSE:SPY) and the iShares Russell 2000 ETF (NYSE:IWM). For SPY, the question is whether investment and output growth translate into earnings across large companies. For IWM, investors must also assess whether smaller businesses can cover borrowing costs when domestic demand softens.

What The GDP Numbers Establish

The 11 U.S. expansions completed since the October 1949 trough averaged 66.6 months. Four lasted longer than 78 months, reaching 92, 106, 120 and 128 months. A historical average is not an expiration date for the current cycle.

The Bureau of Economic Analysis reported that real final sales to private domestic purchasers increased 4.9% annualized in the third quarter, versus 4.6% in the second. This measure includes consumer spending and gross private fixed investment, but excludes inventories, government spending and net exports.

Overall investment growth reflected both private inventory investment and equipment spending, including information-processing equipment. Inventory accumulation can change subsequent production needs, while equipment investment raises the question of whether capital expenditures eventually generate revenue and cash flow.

For the capitalization-weighted S&P 500, stronger aggregate GDP does not establish that earnings gains are broad across constituents. SPY investors can compare growth in sales and operating cash flow with capital spending, and check whether earnings gains are concentrated among a limited group of companies.

September consumer data complicate the picture. Nominal personal consumption expenditures rose 0.5%, but the PCE price index also rose 0.5%. Inflation-adjusted spending increased less than 0.1%, rounded to 0.0%. Higher nominal sales need not signal stronger real demand.

Why IWM Faces A Different Test

IWM tracks the Russell 2000, where borrowing structures add another variable. Wells Fargo Investment Institute reported on October 27 that floating-rate borrowing represented 40.07% of the Russell 2000’s debt classified by interest-rate type, compared with 8.50% for the S&P 500, using data as of October 13.

These percentages concern debt for which interest-rate type could be classified, not all debt outstanding across either index. They are not measurements of ETF-level interest expense.

The gap nevertheless identifies a financing channel worth examining. Floating-rate debt can reprice as short-term rates change, while fixed-rate debt generally reflects prevailing market conditions when refinanced. If demand weakens while borrowing costs remain high, interest expense can absorb more operating income at affected companies.

September payrolls rose 29,000 following revised changes of minus 10,000 in July and plus 133,000 in August. Their sum implies a third-quarter gain of 152,000. August and September estimates remain preliminary.

The Bureau of Labor Statistics puts the approximate 90% confidence interval for a monthly payroll change at plus or minus 122,000. September’s gain is not statistically distinguishable from zero at that level; this does not establish that employment was unchanged.

What Investors Should Watch Next

For SPY, the next test is whether stronger investment translates into broader earnings, margins and cash-flow growth. Investors can examine capital expenditures against operating cash flow and look beyond index-level earnings totals to their concentration.

For IWM, the parallel test combines sales demand and debt service. Quarterly results can show changes in interest expense relative to EBITDA, refinancing rates, interest coverage and free cash flow. Index-level debt exposure alone cannot establish how each company will fare.

September PCE inflation was 3.6% year over year, while core PCE inflation, excluding food and energy, was 3.1%. On October 28, the Federal Reserve held its policy target at 3.75% to 4.00%, with two dissenters preferring an increase.

October employment is scheduled for November 6, while updated third-quarter GDP and October personal income and spending are scheduled for November 25. Both could change the assessment.

The distinction is in what investors need to verify. SPY raises questions about the breadth and returns of investment-led growth. IWM adds a more immediate test of domestic demand, debt repricing and interest coverage. Neither follows from the expansion’s age alone.

Sources

• NBER — U.S. Business Cycle Expansions and Contractions
• BEA — GDP Advance Estimate, Q3 2026, October 29
• BEA — Personal Income and Outlays, September 2026, October 29
• BLS — September 2026 Employment Situation, October 2
• Federal Reserve — FOMC Statement, October 28, 2026
• Wells Fargo Investment Institute — Chart of the Week, October 27, 2026
• State Street — SPY Fund Information
• iShares — IWM Fund Information

Further filing-anchored structural research is published at dividendforensics.com.

Benzinga Disclaimer: This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.