Small Caps Shine Following Fed’s First Rate Cut in 9 Months
Russell 2000 climbs as investors bet cheaper borrowing will fuel growth.
The Federal Reserve delivered its first rate cut in nine months, and small-cap stocks wasted no time celebrating. While the S&P 500 (SPX) dipped modestly and the Russell 3000 Index (RUA) closed near even, the Russell 2000 Index (RUT) broke through a milestone, briefly topping its record level from 2021 before paring gains.
The Fed’s decision to reduce its benchmark rate by a quarter point to a target range of 4.00%–4.25% ignited a sharp rotation into small caps, with traders positioning for further easing. Two more cuts remain on the table before year-end, a shift that could reshape equity performance across sectors.
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Fed Eases Amid Softening Labor Market
The 11-to-1 Federal Open Market Committee (FOMC) vote reflected broad support for the move, with only Governor Stephen Miran favoring a deeper half-point cut. Chair Jerome Powell described the action as a balance between caution and support.
Powell stated:
“The marked slowing in both the supply of and demand for workers is unusual in this less dynamic and somewhat softer labor market. The downside risks to employment appear to have risen.”
That acknowledgment helped solidify expectations that the central bank will remain in an easing cycle. Futures markets now see high odds of additional rate cuts in both October and December.
FOMC Press Conference September 17, 2025
Source: Federal Reserve YouTube
Russell 2000 Steals the Spotlight
The Russell 2000 Index surged as much as 2.1% intraday, hitting 2,453.36, its highest level since November 2021, before finishing up 0.18%. Its companion fund, the iShares Russell 2000 ETF (NYSE Arca: IWM), added 0.26%. In contrast, the broader Russell 3000 Index slipped 0.07%, and the iShares Russell 3000 ETF (NYSE Arca: IWV) edged down 0.11%.
Small caps’ sensitivity to borrowing costs makes them prime beneficiaries of rate relief. Historically, when the Fed restarts cuts after long pauses, smaller companies tend to outperform. Canaccord Genuity research shows the Russell 2000 has averaged 35% returns in the 12 months following such cycles.
Tom Lee, head of research at Fundstrat Global Advisors, summed it up plainly on CNBC: “I think it means we have a dovish Fed again. That’s kind of a green light for small caps.”
Top Gainers Lead the Charge
The day’s trading underscored the market’s appetite for risk. A wave of small-cap names ripped higher:
- Bgm Group (NASDAQ: BGM) soared 25.46%.
- Monopar Therapeutics (NASDAQ: MNPR) climbed 16.91%.
- Tvardi Therapeutics (NASDAQ: TVRD) advanced 15.25%.
- Tryhard Holdings (NASDAQ: THH) rose 15.18%.
- Ballard Power Systems (NASDAQ: BLDP) jumped 15.91%.
Meanwhile, microcaps stole headlines with even sharper moves. Scisparc (NASDAQ: SPRC) rocketed 142.93%, Visionary Holdings (NASDAQ: GV) surged 68.67%, Apollomics (NASDAQ: APLM) gained 51.31%, Presidio Property Trust (NASDAQ: SQFT) spiked 46.29%, and Intelligent Protection Management (NASDAQ: IPM) added 22.8%.
These swings highlight both the excitement and the volatility that often follow Fed policy pivots.
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Wall Street Sees Opportunity, And Risk
Market strategists are increasingly warming to small caps, pointing to both fundamentals and macro tailwinds. Jefferies’ Steven DeSanctis noted that second-quarter earnings for small-cap companies exceeded expectations and could soon outpace large caps and tech leaders.
DeSanctis stated:
“Earnings for small-cap companies were quite good in the second quarter, much better than expected, and there is an anticipation by later this year or into next year, small-cap earnings growth is going to exceed that of both large-cap and the Magnificent Seven.”
Yet not all analysts are fully convinced. Wells Fargo’s (NYSE: WFC) Doug Beath warned that many smaller firms remain vulnerable to tariffs and cost pressures. Irene Tunkel of BCA Research added a note of caution: “The bottom line: the rebound has been impressive, but many smaller companies face rising costs and shrinking margins, making this rally fragile.”
What Comes Next
The S&P 500 closed down 0.1%, underscoring investors’ mixed reaction to the Fed’s move. Still, the small-cap rally suggests growing confidence that cheaper money will filter quickly into smaller firms’ balance sheets.
If history holds, the Russell 2000 may have more room to run. However, with inflation still elevated and political pressures looming over the Fed, investors will be closely watching every data point as the next two policy meetings draw closer.
For now, small caps are enjoying the spotlight, a rare moment where Wall Street’s giants take a back seat to the market’s scrappier players.
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