Why are Small Caps in the Doldrums? | Presented by CME Group

Relative Performance - Small cap stocks are more sensitive to economic cycles and interest rate changes than large cap stocks [1] - Historically, small cap stocks have outperformed large caps by 2% to 3% annually, but have recently lagged due to high interest rates and economic uncertainty [1] Impact of Interest Rates - The Federal Reserve's high rate environment since 2022 has weighed heavily on small caps, which typically rely on borrowing to fuel growth [2] - Higher interest rates increase borrowing costs and compress valuations, hitting small cap profitability hard [2] - Rate cuts are bullish for small caps as these companies pay reduced interest expenses on debt [2] Economic Impact of Rate Cuts - Rate cuts tend to stimulate the domestic economy, which benefits small cap companies that rely on domestic demand [3] - Increased consumer spending and business investment, resulting from rate cuts, can disproportionately benefit small cap companies [3]