Russell 2000 Hits Record High as Rate Cuts Fuel Small-Cap Rally

The Russell 2000 index of small-cap stocks closed at an all-time high this week, marking its first record since 2021. The rally follows the Federal Reserve's decision to cut interest rates by 25 basis points, with two additional reductions projected this year. Small caps, often overshadowed by large-cap peers, are now outpacing broader indices as lower borrowing costs and attractive valuations draw investor interest.

The iShares Russell 2000 ETF has outperformed its large-cap counterpart over the past three months, signaling a potential rotation into undervalued segments. Historically, small companies thrive in easing monetary environments—their earnings sensitivity and debt structures magnify the benefits of cheaper capital. Yet the rally faces skepticism: lingering inflation risks and uneven economic growth could temper gains.