Can the small-cap surge continue?
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.
Russell 2000 Index of Small-Company Stocks
Bloomberg, calculations by Horizon, data as of 09/19/2025. Indices are unmanaged and do not have fees or expense charges, both of which would lower returns. It is not possible to invest directly in an index.
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.