Small-Cap Stocks Finally Break Through to New Highs
The S&P 500 has delivered strong returns the past two years, setting 57 all-time highs in 2024 and adding more than 35 in 2025.
For your convenience, we’ve also provided a PDF copy of the Chart of the Month | Small-Cap Stocks Finally Break Through to New Highs
Large-cap stocks have benefited from a combination of AI enthusiasm, resilient earnings, and strong economic growth. However, one corner of the market has been noticeably absent: small-cap stocks. While the S&P 500 climbed to new highs, Figure 1 shows the Russell 2000, an index of small-cap stocks, remained stuck below its November 2021 peak. The four-year drought ended this fall when small caps broke through to new highs, driven by expectations for additional Federal Reserve rate cuts.
Small-cap stocks are more sensitive to interest rates than their large-cap counterparts. Many smaller companies carry higher debt loads relative to their size and rely more heavily on borrowing to fund growth. When interest rates rise, financing costs squeeze profit margins. Conversely, when interest rates fall, the pressure eases as borrowing becomes cheaper. Small’s recent underperformance began when the Federal Reserve started its rate-hiking cycle in 2022, but it started to reverse this year in Q3. Expectations for additional rate cuts have breathed new life into small-caps. Small-cap stocks gained +12% in Q3 compared to +7.8% for large caps, the largest relative outperformance since Q1 2021. The outperformance has continued into Q4, with small caps outperforming large caps by +1.0% quarter-to-date.
Beyond the Fed’s actions, valuations and investor flows tell a compelling story. Small-cap stocks trade at a significant discount to large caps, with the valuation gap at extremes. Figure 2 shows small-cap ETFs have posted net outflows this year, shedding roughly $12.5 billion through October 2025. It’s the first year of net outflows since 2011.
The message is clear: small-cap stocks haven’t just underperformed; they’ve been actively avoided. Investors poured money into large-cap tech and AI-related names while small-caps were left behind. The combination of depressed valuations and persistent outflows suggests these stocks are not just undervalued but genuinely unloved and under owned. This creates a potential opportunity for long-term investors.
Small-cap stocks bring diversification at a time when the S&P 500 is highly concentrated in a few mega-cap tech names. Small-caps are more domestically focused, spread across a wider range of industries, and less dependent on the AI narrative. While they are more volatile than large caps, the investment case appears to be strengthening. Fed rate cuts favor smaller borrowers, small- caps trade at a steep valuation discount, and investor positioning is light. The recent breakout to new highs could mark a turning point. For those with a long-term horizon, small-caps might deserve consideration in 2026.
Disclosure
The information and opinions provided herein are provided as general market commentary only – not financial advice – and are subject to change at any time without notice. This commentary may contain forward-looking statements that are subject to various risks and uncertainties. None of the events or outcomes mentioned here may come to pass, and actual results may differ materially from those expressed or implied in these statements. No mention of a particular security, index, or other instrument in this report constitutes a recommendation to buy, sell, or hold that or any other security, nor does it constitute an opinion on the suitability of any security or index. The report is strictly an informational publication and has been prepared without regard to the particular investments and circumstances of the recipient.
Past performance does not guarantee or indicate future results. Any index performance mentioned is for illustrative purposes only and does not reflect any management fees, transaction costs, or expenses. Indexes are unmanaged, and one cannot invest directly in an index. Index performance does not represent the actual performance that would be achieved by investing in a fund.
See Full Disclosures Page
Concerns or questions about how your investment portfolio will hold up in the current market environment? Contact Financial Synergies today.
We are a boutique, financial advisory and total wealth management firm with over 35 years helping clients navigate turbulent markets. To learn more about our approach to investment management please reach out to us. One of our seasoned advisors would be happy to help you build a custom financial plan to help ensure you accomplish your financial goals and objectives. Schedule a conversation with us today.
More relevant articles by Financial Synergies:
Blog Disclosures
This content, which may contain security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own financial advisors as to legal, business, tax, and other related matters concerning any investment.
The commentary in this “post” (including any related blogs, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Financial Synergies Wealth Advisors, Inc. employees providing such comments, and should not be regarded as the views of Financial Synergies Wealth Advisors, Inc. or its respective affiliates or as a description of advisory services provided by Financial Synergies Wealth Advisors, Inc. or performance returns of any Financial Synergies Wealth Advisors, Inc. client.
Any opinions expressed herein do not constitute or imply endorsement, sponsorship, or recommendation by Financial Synergies Wealth Advisors, Inc. or its employees. The views reflected in the commentary are subject to change at any time without notice.
Nothing on this website or Blog constitutes investment or financial planning advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. It also should not be construed as an offer soliciting the purchase or sale of any security mentioned. Nor should it be construed as an offer to provide investment advisory services by Financial Synergies Wealth Advisors, Inc.
Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Financial Synergies Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
Any charts provided here or on any related Financial Synergies Wealth Advisors, Inc. personnel content outlets are for informational purposes only, and should also not be relied upon when making any investment decision. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional. Any projections, estimates, forecasts, targets, prospects and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Information in charts have been obtained from third-party sources and data, and may include those from portfolio securities of funds managed by Financial Synergies Wealth Advisors, Inc. While taken from sources believed to be reliable, Financial Synergies Wealth Advisors, Inc. has not independently verified such information and makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. All content speaks only as of the date indicated.
Financial Synergies Wealth Advisors, Inc. is a registered investment adviser. Advisory services are only offered to clients or prospective clients where Financial Synergies Wealth Advisors, Inc. and its representatives are properly licensed or exempt from licensure. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
See Full Disclosures Page Here
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Chart of the Month | Small-Cap Stocks Finally Break Through to New Highs
Small-Cap Stocks Finally Break Through to New Highs
The S&P 500 has delivered strong returns the past two years, setting 57 all-time highs in 2024 and adding more than 35 in 2025.
For your convenience, we’ve also provided a PDF copy of the Chart of the Month | Small-Cap Stocks Finally Break Through to New Highs
Large-cap stocks have benefited from a combination of AI enthusiasm, resilient earnings, and strong economic growth. However, one corner of the market has been noticeably absent: small-cap stocks. While the S&P 500 climbed to new highs, Figure 1 shows the Russell 2000, an index of small-cap stocks, remained stuck below its November 2021 peak. The four-year drought ended this fall when small caps broke through to new highs, driven by expectations for additional Federal Reserve rate cuts.
Small-cap stocks are more sensitive to interest rates than their large-cap counterparts. Many smaller companies carry higher debt loads relative to their size and rely more heavily on borrowing to fund growth. When interest rates rise, financing costs squeeze profit margins. Conversely, when interest rates fall, the pressure eases as borrowing becomes cheaper. Small’s recent underperformance began when the Federal Reserve started its rate-hiking cycle in 2022, but it started to reverse this year in Q3. Expectations for additional rate cuts have breathed new life into small-caps. Small-cap stocks gained +12% in Q3 compared to +7.8% for large caps, the largest relative outperformance since Q1 2021. The outperformance has continued into Q4, with small caps outperforming large caps by +1.0% quarter-to-date.
Beyond the Fed’s actions, valuations and investor flows tell a compelling story. Small-cap stocks trade at a significant discount to large caps, with the valuation gap at extremes. Figure 2 shows small-cap ETFs have posted net outflows this year, shedding roughly $12.5 billion through October 2025. It’s the first year of net outflows since 2011.
The message is clear: small-cap stocks haven’t just underperformed; they’ve been actively avoided. Investors poured money into large-cap tech and AI-related names while small-caps were left behind. The combination of depressed valuations and persistent outflows suggests these stocks are not just undervalued but genuinely unloved and under owned. This creates a potential opportunity for long-term investors.
Small-cap stocks bring diversification at a time when the S&P 500 is highly concentrated in a few mega-cap tech names. Small-caps are more domestically focused, spread across a wider range of industries, and less dependent on the AI narrative. While they are more volatile than large caps, the investment case appears to be strengthening. Fed rate cuts favor smaller borrowers, small- caps trade at a steep valuation discount, and investor positioning is light. The recent breakout to new highs could mark a turning point. For those with a long-term horizon, small-caps might deserve consideration in 2026.
Disclosure
The information and opinions provided herein are provided as general market commentary only – not financial advice – and are subject to change at any time without notice. This commentary may contain forward-looking statements that are subject to various risks and uncertainties. None of the events or outcomes mentioned here may come to pass, and actual results may differ materially from those expressed or implied in these statements. No mention of a particular security, index, or other instrument in this report constitutes a recommendation to buy, sell, or hold that or any other security, nor does it constitute an opinion on the suitability of any security or index. The report is strictly an informational publication and has been prepared without regard to the particular investments and circumstances of the recipient.
Past performance does not guarantee or indicate future results. Any index performance mentioned is for illustrative purposes only and does not reflect any management fees, transaction costs, or expenses. Indexes are unmanaged, and one cannot invest directly in an index. Index performance does not represent the actual performance that would be achieved by investing in a fund.
See Full Disclosures Page
Concerns or questions about how your investment portfolio will hold up in the current market environment? Contact Financial Synergies today.
We are a boutique, financial advisory and total wealth management firm with over 35 years helping clients navigate turbulent markets. To learn more about our approach to investment management please reach out to us. One of our seasoned advisors would be happy to help you build a custom financial plan to help ensure you accomplish your financial goals and objectives. Schedule a conversation with us today.
More relevant articles by Financial Synergies:
Blog Disclosures
This content, which may contain security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own financial advisors as to legal, business, tax, and other related matters concerning any investment.
The commentary in this “post” (including any related blogs, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Financial Synergies Wealth Advisors, Inc. employees providing such comments, and should not be regarded as the views of Financial Synergies Wealth Advisors, Inc. or its respective affiliates or as a description of advisory services provided by Financial Synergies Wealth Advisors, Inc. or performance returns of any Financial Synergies Wealth Advisors, Inc. client.
Any opinions expressed herein do not constitute or imply endorsement, sponsorship, or recommendation by Financial Synergies Wealth Advisors, Inc. or its employees. The views reflected in the commentary are subject to change at any time without notice.
Nothing on this website or Blog constitutes investment or financial planning advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. It also should not be construed as an offer soliciting the purchase or sale of any security mentioned. Nor should it be construed as an offer to provide investment advisory services by Financial Synergies Wealth Advisors, Inc.
Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Financial Synergies Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
Any charts provided here or on any related Financial Synergies Wealth Advisors, Inc. personnel content outlets are for informational purposes only, and should also not be relied upon when making any investment decision. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional. Any projections, estimates, forecasts, targets, prospects and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Information in charts have been obtained from third-party sources and data, and may include those from portfolio securities of funds managed by Financial Synergies Wealth Advisors, Inc. While taken from sources believed to be reliable, Financial Synergies Wealth Advisors, Inc. has not independently verified such information and makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. All content speaks only as of the date indicated.
Financial Synergies Wealth Advisors, Inc. is a registered investment adviser. Advisory services are only offered to clients or prospective clients where Financial Synergies Wealth Advisors, Inc. and its representatives are properly licensed or exempt from licensure. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
See Full Disclosures Page Here
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