Key Takeout
- The Russell 2000, a key index for smaller companies, reached record highs this week for the first time in several years, coinciding with the Federal Reserve’s shift towards rate cuts.
- Some analysts project that small-cap stocks could outperform larger ones in the near term due to their comparatively low ratings versus historical averages and big players.
- The Ishares Russell 2000 ETF has outpaced the Ishares Russell 1000 ETF, which tracks larger firms, over the last three months.
A small engine that can be done.
The Russell 2000 Index closed yesterday at 2467.70, marking a new peak for the first time since 2021, with small stocks gaining momentum due to expectations of lower interest rates.
Investors have been on the lookout for small-cap stocks—defined as those with market caps between $250 million and $2 billion—to begin consistently outperforming, particularly given the robust performance of larger stocks this year. While both the Russell and the S&P 500 indices have risen steadily, the latter significantly outperformed in 2025.
Small companies generally thrive in environments with low interest rates, which enhances their profits and cuts funding costs. Additionally, their relatively low valuations and optimistic revenue forecasts further bolster their potential.
“There are definitely some pauses here, as investors have been quite patient waiting for small caps to shine. They need to see actual gains in this sector before fully believing in the trend,” an analysis from last week noted.
The Ishares Russell 2000 ETF (IWM) has recorded a return of 15% over the last three months, surpassing the Ishares Russell 1000 ETF (IWB), which tracks larger firms, according to Yahoo Finance. Still, some believe there’s more room for growth.
As of the end of August, projections indicated an annual revenue growth of 8% for small-cap companies over the next decade, in contrast to less than 1% for large-cap firms, following insights from a recent BOFA Global Research report that analyzed historical data of the Russell 2000 and Russell 1000 indices.
Analysts have also noted that small caps are expected to increase revenue at a quicker pace than their larger counterparts in the upcoming quarters, indicating a shift from past trends.
Another relevant metric to consider is the ISM manufacturing index, which tracks the performance of the manufacturing sector in relation to the overall economy. Typically, this index aligns well with small-cap performance. Currently, the index sits at 49 as of August, after hovering below 50 for six months, which signals contraction.
