Russell 2000 is 'clear winner' from Fed rate cut, reaches new all-time high

The small- and mid-cap tracking Russell 2000 index rose to a record high yesterday, September 18, refreshing the previous high mark from 2021. It came a day after the Fed cut interest rates. The Russell 2000 is the "clear winner" from the Fed decision, says Noble Capital Markets in a note. Analysts expect the rally to continue, but fear markets may be overheating.

The Russell 2000 gained 2.5% yesterday to close at 2,467.7 points. This marks a new all-time high for the U.S. small-cap benchmark. The previous record had been set on November 8, 2021, when the index finished at 2,442.74 points.

The rally came a day after the Fed cut rates by 25 basis points, the first reduction this year.

Small caps and the Russell 2000 in particular have emerged as the "clear winner" of the Fed rate cut, Noble writes: yesterday, the S&P 500 climbed 0.5%, and the Nasdaq Composite 1.1%, while the Dow Jones Industrial Average rose 0.3%.

For small-cap investors, the Fed’s move signals a "potential turning point," Noble writes. Small- and mid-cap companies often rely heavily on external financing to support operations and growth. Lower interest rates reduce that burden, freeing up capital for expansion and making smaller firms more attractive to investors.

The American Association of Individual Investors reported a surge in bullish sentiment this week, with 41.7% of respondents now optimistic on the short-term outlook for stocks, up sharply from 28% the previous week.

Freedom Broker expects the small-cap rally to extend through the year-end, it said in response to questions from Oninvest. Its analysts point to two main drivers.

First, investors are anticipating two additional 25-basis-point rate cuts by the year-end. Markets currently put the probability of this outcome at 72%, but a move closer to 100% would provide a significant boost for small caps and fast-growing tech names, the analysts say.

Second, fundamentals are improving. In the second quarter, the Russell 2000’s aggregate EPS turned positive for the first time in three years, up 19% year over year, Freedom Broker points out. Its analysts now expect EPS growth of 29.2% in full-year 2025 and 40.5% in 2026.

“The recovery in small-cap profitability is one of the key signals for stock price growth in the current environment, as it is the first step out of a prolonged period of depressed earnings,” Freedom Broker said.

Meanwhile, David Tepper, founder and president of hedge fund Appaloosa Management, told CNBC that the Fed risks overheating the markets and the economy if it cuts rates too much next year.

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