Small-cap companies in the U.S. are expected by analysts to increase profits much more quickly than larger companies as they see the greatest benefits from lower borrowing rates and tax breaks. ...

Core Insights - Small-cap stocks have outperformed large-cap stocks in Q3 2025, with the Russell 2000 Index rising 12.4% compared to an 8.0% gain for the Russell 1000 Index, marking a significant shift in market dynamics [2][3] - Micro-cap stocks showed even stronger performance, with the Russell Microcap Index increasing by 17.0% [3] - The overall U.S. stock market demonstrated resilience, with major indexes reaching new highs, supported by lower interest rates and a robust economy [2][3] Performance Overview - From April 8, 2025, to September 30, 2025, the Russell 2000 gained 39.9%, while the Russell 1000 advanced by 35.2% [7] - The Russell Microcap Index surged by 53.8% during the same period, indicating strong recovery and growth in smaller stocks [8] - For the year-to-date period ending September 30, 2025, the Russell 2000 rose 10.4%, while the Russell 1000 increased by 14.6% [11] Sector Contributions - All 11 sectors within the Russell 2000 contributed positively in Q3 2025, with Industrials, Information Technology, Health Care, and Consumer Discretionary performing particularly well [17][20] - Cyclical sectors outperformed defensive sectors, aligning with expectations in a growing economy [17] Valuation Insights - Small-cap stocks are considered more reasonably valued compared to large-cap stocks, with the Russell 2000's weight in the Russell 3000 Index at 4.4%, significantly below the historical average of 7.6% [21][22] - Valuations for the Russell 2000 remain attractive relative to the Russell 1000, based on the EV/EBIT metric [25][26] Earnings Growth Expectations - Small-cap companies are expected to experience stronger earnings growth compared to large-caps, aided by lower interest rates and recent federal legislation that enhances cash flow [29][30] - The potential for multiple expansion in small-caps is anticipated through the end of 2025 and beyond, as many small-cap firms emerge from a two-year earnings recession [29]