The Russell 2000 has fallen nearly 9% from its peak and is nearing a correction. What should investors do?

Stocks of small U.S. companies have lost ground to their larger counterparts: the Russell 2000 has fallen nearly 9% from its record high in August, approaching a correction. Small-cap stocks are under pressure from rising borrowing costs—small companies are more sensitive to high interest rates. Oninvest analyst Aldiyar Anuarbekov examined what could reignite interest in the sector and which two stocks are worth watching following the decline.

As early as the summer of 2026, the year looked set to be one of redemption for small-cap stocks. By the end of June, the Russell 2000 had gained more than 21% year-to-date, while the S&P 500 had risen only 7.4%, with the gap between the indices reaching its highest level of the year. On August 14, the Russell 2000 set a new closing record at 3,068.42 points. But by early October, that lead had vanished: as of October 9, the S&P 500 had gained 14% year-to-date, outperforming the small-cap index, which had risen 13%.

The Russell 2000 is currently trading 8.9% below its August record high and is approaching a correction—a 10% decline from its peak. Technically, the index has not yet entered a correction: for that to happen, it would need to close at 2,761.58 points or lower.

One of the main sources of pressure is expensive borrowing. In September, the Fed raised its benchmark rate to 3.75–4%, and most meeting participants believe another rate hike is likely before the end of the year, according to the minutes. The yield on 10-year U.S. Treasury bonds reached 5.35% on October 8—its highest level since 2002.

This is particularly painful for small companies: they typically have higher debt levels and a larger share of floating-rate loans, explains Kit Lerner, Chief Investment Officer at Truist Advisory Services.

The decline in the index does not tell the whole story. According to Bloomberg Intelligence (the report is on file with the editorial office), the median Russell 2000 stock is trading about a quarter below its annual high. In other words, within the index, the decline in individual stocks is significantly steeper than the movement of the Russell 2000 itself.

According to UBS’s calculations, small-cap stocks are currently cheaper relative to expected earnings than in approximately 75% of historical observations. For large-cap companies, the situation is the opposite: their valuations are higher than in 75% of historical observations. This suggests that small-cap companies are relatively undervalued, although this in itself does not guarantee that their stock prices will rise.

The next test for small-cap stocks will be their third-quarter earnings reports. These will show whether companies are able to maintain profits despite high borrowing costs and whether there are grounds to expect profit growth.

However, a rate cut is not a prerequisite for small-cap companies to regain their lead. Francis Gannon, Co-Chief Investment Officer at Royce Investment Partners, notes that in past rate-hiking cycles, small-cap stocks have, on average, outperformed large-cap companies. The only exception was the most recent cycle, when the Fed began raising rates in March 2022 and brought them to 5.25–5.5% by July 2023, with market growth driven primarily by the largest technology companies. In his view, the direction of interest rates alone is an unreliable predictor of which group of stocks will come out on top. For long-term results, earnings and business quality are more important, says Gannon.

Oninvest analyzed 357 companies in the industrial and real estate sectors included in the iShares Russell 2000 ETF (IWM), which tracks the Russell 2000. These two sectors lead the way in terms of improving revenue forecasts, according to Bloomberg Intelligence. We looked for profitable companies with positive free cash flow, moderate debt, and operating income that is more than double the amount of interest paid on debt. An additional criterion was a stock price decline of more than 25% from its annual high. Twenty-three companies met these criteria. We excluded those whose price declines were due to business-specific issues and high sensitivity to high interest rates, and selected one company from each sector: filter manufacturer Atmus Filtration and real estate investment trust National Health Investors.

Atmus Filtration manufactures filters for trucks and industrial equipment. Following its acquisition of Koch Filter, the company expanded its business to include air filtration, including for data centers and power plants.

In the second quarter of 2026, the company’s revenue grew by 16.4% to a record $528 million, adjusted free cash flow increased from $36 million to $67 million, and the company raised its full-year forecast. Atmus CEO Stephanie Discher noted that cyclical growth in demand for filters for new trucks began at the end of the quarter. Bank of America analysts also wrote in a report (on file with the editorial office) that they expect growth in shipments for new trucks and an increase in the company’s profitability.

The main risk is the debt incurred following the acquisition of Koch Filter. As of the end of June, it had nearly reached $1 billion. In the second quarter, operating income was roughly seven times higher than interest expense, but floating-rate loans remain vulnerable to high borrowing costs.

As of October 12, Atmus shares were trading at $43.09, nearly 35% below their 52-week high. On August 10, BofA reaffirmed its “buy” rating with a price target of $73—69% higher than the stock’s closing price on October 12. On September 23, Northland maintained its “outperform” rating with a price target of $67.

According to MarketWatch, the company's stock has five "buy" ratings from Wall Street analysts and one "hold" rating. The average price target is $62.6, which is 45% higher than the most recent closing price.

NHI owns senior housing and medical facilities. The company is expanding this business segment, in which it receives payments from residents and bears the operating costs of the facilities, while delegating their day-to-day management to specialized operators. This allows the company to participate in the growth of the facilities’ revenue, but at the same time increases its dependence on operating costs and the quality of management.

The long-term argument is demographics. According to a forecast by the research firm NIC MAP, the number of Americans aged 80 and older will increase by about one-third by 2030. New housing construction is failing to keep up with demand: in the second quarter, occupancy rates in the markets tracked by NIC MAP approached 90%.

Nevertheless, net operating income from comparable properties in this segment declined by 6.3% in the second quarter, while normalized FFO per share—a metric used to evaluate the performance of real estate investment trusts—fell by 2.5%.

At the same time, net debt stands at 4.1 times annual EBITDA, within the company’s target range, and operating income is sufficient to cover interest expenses approximately four times over. NHI has increased its quarterly dividend to $0.94 per share. At a price of $65.62 as of October 12, this corresponds to an annual yield of approximately 5.7%, assuming the dividend remains unchanged. The stock is trading about 28% below its annual high.

The risk stems from how successfully the company will expand its business and manage the proceeds from the sale of a portion of its portfolio for $560 million. In addition, debt burden and the cost of financing remain important factors for NHI as well.

On August 14, Cantor Fitzgerald reaffirmed its “buy” rating on the fund’s shares with a price target of $90. This implies a 37% increase from the current price. In September, a Truist analyst lowered the price target from $81 to $80 while maintaining a “buy” rating.

Since the beginning of the year, NHI shares have lost about 14% of their value. According to MarketWatch, the company’s stock has a total of six “Buy” ratings and three “Hold” ratings; the average price target of $80.70 implies a 23% increase from the closing price on October 12.

This is not intended as individual investment advice.