LIVE MARKETS-Small caps lose their edge as rate pressures build — WFII

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SMALL CAPS LOSE THEIR EDGE AS RATE PRESSURES BUILD — WFII

After outperforming the market for much of the past year, small-cap stocks have lost some momentum. The Russell 2000 Index .RUT is up 13.3% in 2026, leaving it with only a slim advantage over the S&P 500's .SPX 12.9% gain.

According to Doug Beath, global equity strategist at the Wells Fargo Investment Institute (WFII), last month's Federal Reserve rate hike may be eroding small caps' advantage.

Beath points to a major difference between the two indexes: debt exposure. Roughly 40% of rate-classified debt among Russell 2000 companies carries floating interest rates, compared with less than 10% for S&P 500 companies. Meanwhile, more than 90% of the S&P 500's rate-classified debt is fixed-rate.

That leaves small-cap companies more exposed to rising borrowing costs, which can squeeze profits, pressure cash flow and curb investment.

Given those headwinds, WFII remains "unfavorable" on US small caps and suggests investors use the group's strong year-to-date gains to rebalance into large-cap stocks and attractively valued sectors tied to the artificial intelligence theme, including communication services, industrials and materials.

(Terence Gabriel)

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