The Federal Reserve announced a widely anticipated 25-basis-point rate cut on Wednesday, lowering the federal funds rate to 4.00%–4.25%. The move came amid a mixed session on Wall Street, with the Dow Jones Industrial Average rising 0.54% while the Nasdaq Composite fell 0.33%. Major technology stocks mostly declined.
Even before the Fed’s decision, market dynamics had already displayed clear divergence. In early trading, the Russell 2000 Index—a benchmark for small-cap stocks—jumped 1%, reaching its highest level since December 2023. Blue-chip stocks also advanced, whereas technology shares broadly retreated, weighing on the Nasdaq. The S&P 500 hovered near an all-time high of 6,600 as investors adopted a cautious stance ahead of the announcement.
Over the past month, small caps have quietly emerged as market leaders. Since August 11, the Russell 2000 has surged 8.1%, significantly outperforming the Dow Jones Industrial Average (+4.2%), Nasdaq Composite (+3.5%), and S&P 500 (+3.3%). The shift signals that investors are increasingly turning to riskier, lesser-known small-cap stocks for opportunities after a year dominated by mega-cap tech giants.
Whether the small-cap rally can sustain its momentum will largely depend on the Federal Reserve’s interest rate path. Historical trends show that small caps, as represented by the Russell 2000, often outperform early in a rate-cutting cycle, partly because they are more sensitive to borrowing costs. Moreover, if markets perceive the rate cut as effective in supporting economic growth, improved risk appetite could further benefit higher-beta small-cap stocks.
In contrast, the S&P 500 has historically seen modest declines in the 30 days following a Fed rate cut over the past 25 years, reflecting how investors often price in policy easing in advance and take profits after the decision.
AI-related stocks faced notable selling pressure. Broadcom fell nearly 4%, Nvidia dropped more than 2%, and Amazon, Oracle, Alphabet, and Meta all posted declines. The sell-off was partly triggered by reports that China has restricted domestic companies from purchasing Nvidia’s AI chips, renewing concerns over tech supply-chain disruptions due to geopolitical tensions.
