BIG NUMBER | 12.9% | A Big Quarter for Small Stocks

Small-cap stocks, represented by the Russell 2000, soared more than 2.5% following the Fed’s decision last week to cut a key short-term interest rate—pushing the index to its first record-high close since November 2021, although it nearly made it back in November of last year (see the chart).

What’s more, small caps are up 12.9% so far this quarter*—far outpacing the large-cap S&P 500 index’s 7.7% return.

This surge, coming after an extended period of relative underperformance, has been fueled in part by expectations of Fed rate cuts. Small companies typically depend more on short-term debt to fund their operations than do larger firms—so the Fed’s decision to lower rates should particularly benefit smaller companies by reducing their cost of doing business.

Other factors boosting small caps: Earnings growth in the sector continues to improve, and consumer spending remains strong (as evidenced by higher-than-expected retail sales in August).

That said, small-caps have staged brief rallies in the past before once again falling behind their large-cap peers. But regardless of whether the recent outperformance lasts, we believe a small-cap stock allocation in goals-based portfolios could make sense. For example, given the heavy concentration of tech stocks in some popular large-cap indices, small-cap investments can help diversify a portfolio—especially since many small-cap offerings hold positions in sectors such as financials and industrials that are underrepresented in many large-cap investments.

Originally published September 24, 2025

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*As of September 19, 2025

The Russell 2000 is a widely used stock market index that tracks the performance of approximately 2,000

U.S. small-cap companies. References to indices, or other measures of relative market performance over a specified period of time are provided for informational purposes only. Reference to an index does not imply that any account will achieve returns, volatility or other results similar to that index. The composition of an index may not reflect the manner in which a portfolio is constructed in relation to expected or achieved returns, portfolio guidelines, restrictions, sectors, correlations, concentrations, volatility or tracking error targets, all of which are subject to change. It is not possible to invest directly in an index. Information obtained from third party sources is believed reliable but has not been vetted by the firm or its personnel.

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