Traders work on the floor of the New York Stock Exchange on August 11, 2025.
NYSE
Small-cap stocks jumped Wednesday, bucking the decline from some of the market’s largest companies, as investors bet that the Federal Reserve will cut interest rates starting in September — lowering the cost of capital and possibly boosting consumer spending.
The small-cap-focused Russell 2000 gained around 2% in the session. By comparison, the broad S&P 500 added just 0.3%, held back by major technology stocks.
The CNBC Magnificent 7 Index, which tracks seven megacap technology companies, fell 0.4% despite hitting a 52-week high at one point in the session. Meta and Microsoft led the slide, with each dropping more than 1%.
“If the Fed cuts rates in September, this would greatly benefit small caps, as many small caps are levered to the economy and also financially,” said Larry Tentarelli, founder of the Blue Chip Trend Report, who called small caps a “rate cut rotation” play.
Among the largest percentage gains in small caps Wednesday were Chemours and Hillenbrand, which respectively climbed more than 17% and 12%. Dream Finders Homes added 13%, while Jack in the Box gained 12%.
One-day chart of Russell 2000 vs Mag 7
With Wednesday’s gain, the Russell 2000 has added nearly 5% this week, on track for its best week since November.
Traders expect rate cuts
The rally comes as investors have grown confident that the Fed will lower rates at its next policy meeting on Sept. 16-17. Lower rates particularly benefit small companies that rely on borrowed capital to finance their operations, inventories or expansion plans.
Interest rate futures traders are pricing in a nearly 100% likelihood that the central bank lowers the fed funds rate from its current 4.35% to 4.50% range at the September gathering, according to prices of 30-day futures on the CME that are calculated on its FedWatch tool. That’s up from less than 60% a month ago.
A growing chorus of economic and political voices have been pushing for rate cuts, especially after weaker-than-expected job growth in July, a downward revision to labor market growth in May and June, and this week’s consumer inflation report that showed a cooler-than-expected headline reading. The Fed has held rates steady since last December, partly due to questions surrounding the effect of President Donald Trump’s tariffs on inflation.
But July’s Fed meeting showed divisions in what central bankers see as the best path for future monetary policy, with two members of the Federal Open Market Committee voting against holding rates steady. After Fed Governor Adriana Kugler resigned earlier this month, Trump said he would nominate economic advisor Stephen Miran to fill the vacancy.
Trump and his allies have frequently attacked Fed Chair Jerome Powell in recent months over the central bank’s rate policy, urging the committee to ease monetary policy. The president has also hinted at firing Powell and on Tuesday threatened to let a lawsuit focused on the cost of the Fed’s headquarters renovation go forward.
Treasury Secretary Scott Bessent told Bloomberg on Wednesday that the Fed should lower rates by at least 1.5 percentage points.
“I think we could go into a series of rate cuts here, starting with a 50 basis point rate cut in September,” Bessent said, adding that “any model” suggests “we should probably be 150, 175 basis points lower.” One basis point equals 1/100th of a percent, or 0.01%.
Wednesday’s move notwithstanding, small caps have a long way to go to catch up with the stock market’s leaders. Since the introduction of the ChatGPT artificial intelligence app in late 2022, the Russell 2000 index has advanced less than 26% while the S&P 500 has climbed 64% over the same span.
— CNBC’s Lisa Kailai Han contributed to this report.
