Small caps lose performance edge as interest rates rise

small caps: Small-cap stocks are shares of companies with relatively modest market capitalizations, often represented by indexes such as the Russell 2000. They are relevant to the news because investors had used them as a way to diversify away from concentrated artificial-intelligence-related large-cap trades, but their relative advantage has weakened as interest rates have risen. Interest rates: The Federal Reserve recently raised its benchmark interest-rate target, while officials signaled that monetary policy could remain restrictive, a backdrop that tends to pressure rate-sensitive smaller companies. Market performance: The Russell 2000’s lead over the S&P 500 narrowed sharply during September, indicating that small caps were losing momentum relative to large-cap stocks. Financing sensitivity: Small and mid-sized companies generally have less capacity to absorb higher borrowing costs than the largest companies, making them more vulnerable when financial conditions tighten.