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Skip NavigationMarketsBusinessInvestingTechPolitics & PolicyVideoWatchlistInvesting ClubPROLivestreamMenuThe Russell 2000 is on track to do something it hasn’t since the early days of the Covid pandemic. The small cap-focused index has underperformed the S & P 500 by more than 9 percentage points in the third quarter. If that holds through the end of the quarter on Wednesday, it would mark the steepest underperformance for the Russell 2000 by percentage-point difference since the first quarter of 2020 — when it lagged the S & P 500 by nearly 11 percentage points. The Russell 2000 is down more than 6% this quarter, putting it on pace to snap a winning streak of five consecutive quarters. The index is down more than 4% in September alone. Small caps have come under pressure as interest rates and Treasury yields rise. Market participants view higher interest rates as particularly harmful to smaller companies, which tend to rely more heavily on borrowing to fuel growth. “It’s all about interest rates,” said Sam Stovall, chief investment strategist at CFRA Research. “When interest rates go up, it tends to be a bigger drag on the finances of of the small-cap stocks.” The Federal Reserve this month issued its first interest rate hike in three years . Fed funds futures traders anticipate that the central bank will move rates higher in the near future, further driving up borrowing costs. Meanwhile, the 10-year and 30-year Treasury yields hit their highest levels in more than a decade last week. Bond traders are increasingly concerned about sticky inflation and the government’s ballooning debt pile. US10Y ALL mountain 10-year U.S. Treasury Stovall said the pullback in small caps also reflects a backburner fear among investors that a rate-hiking cycle from the Fed could push the U.S. economy into a recession. When to get off the sidelines To be sure, the Russell 2000 is still up more than 13% in 2026 despite this quarter’s turmoil. It’s also on track for its fourth straight year of double-digit gains. The small-cap index has cumulatively added about 60% since the start of 2023. Though it has underperformed the S & P 500, which has roughly doubled in the same period. .RUT .SPX 5Y mountain The Russell 2000 vs. S & P 500, 5-year With this quarter’s declines, Stovall said the price-to-earnings multiple for the Russell 2000 is at an approximately 34% discount compared with its 20-year average. While he said that makes the group inexpensive, he also said investors will likely want to wait to buy in until they have more clarity on the path of borrowing costs. “Investors are probably taking whatever profits they have in small caps and basically saying, “I’ll wait on the sidelines until things start to look better,’” Stovall said. “Should there come a time in which the picture looks a little brighter from an interest rate perspective, then we could see investors move back into the small-cap arena.”Read More