BofA, UBS eye small-cap outperformance after Powell's dovish remarks

In the weeks ahead, the Russell 2000, the benchmark for U.S. small-cap stocks, may continue to outperform large-cap peers. In remarks in Jackson Hole on Friday, August 22, Fed Chair Powell signaled that interest rates could be cut as early as September. The remarks lifted all major equity indexes, while the iShares Russell 2000 ETF drew its largest inflows since November 2024.

"In the absence of major tariff news or other macro surprises, we think the Russell 2000 likely leads large caps in the coming weeks,” BofA equity strategist Jill Carey Hall wrote in a note to clients yesterday, as quoted by Bloomberg.

Strategists at UBS take a similar view, writing that small caps and low-quality stocks “could continue to outperform as rate cuts help alleviate balance sheet pressures.” The Russell 2000 has jumped 8% month to date, compared with a 3.2% gain in the S&P 500 during that time.

BofA issued a note to clients yesterday, August 25, flagging opportunities in small-cap stocks following Powell’s dovish remarks in Jackson Hole on Friday. Powell reinforced expectations that the Fed could begin cutting rates as early as September, Bloomberg writes. Lower borrowing costs would provide relief to small companies, which tend to carry higher levels of floating-rate debt, UBS noted. That makes them particularly sensitive to changes in interest rates and Fed policy.

Markets rallied after Powell’s remarks. On Friday, the S&P 500 rose 1.5%, while the Dow Jones Industrial Average and the tech-heavy Nasdaq Composite added about 1.9% each. 

The Russell 2000 posted the biggest gain, surging almost 4% on Friday. Investors injected the most cash into the iShares Russell 2000 ETF since November, according to Bloomberg.

“Small caps finally broke out after Jackson Hole,” Lori Calvasina, RBC Capital Markets’ head of U.S. equity strategy, wrote in a note to clients quoted by Bloomberg.

The sector may be poised for near-term gains, driven in part by investor positioning and some rotation away from the biggest tech companies, she said. However, Calvasina said she is staying neutral longer term relative to large caps.

Hall of BofA said she is watching next week’s jobs report for support for a September Fed rate cut. Beyond that, she says a persistent rally for the sector will depend on earnings, sales trends, and tariff risks. Hall cautioned that October has historically been the worst month for small-cap performance versus large caps.

The AI translation of this story was reviewed by a human editor.