Weekly Buzz: Small caps, big wins 💪

Size isn't everything in the stock market. Small caps – companies worth between US$300 million and US$2 billion – have been outperforming their larger peers across major markets, and this trend.

What’s going on here?

Following the Liberation Day selloff in April this year, the Russell 2000 small-cap index has gained 24.3%, beating the S&P 500's 21.7% – quite the achievement in a market where mega-cap tech stocks typically steal the spotlight.

This isn't just a recent trend either. Small caps have been outperforming for years in many regions, with several tailwinds now working in their favour – one of the biggest being interest rate cuts.

When borrowing costs are high, smaller companies feel the pinch most acutely – they can't access capital markets as easily as Apple or Microsoft. As central banks cut rates, however, that financing pressure eases, giving small caps room to grow.

Small caps are also attracting investors from a value perspective, trading at their steepest discount to large caps in over two decades. Plus, they're more domestically focused, which shields them from the trade tensions and currency swings that have been rattling global markets.

What does this mean for you?

Small caps offer an avenue for genuine diversification. While major indices have become increasingly concentrated to a handful of giants – à la the Magnificent Seven – small-cap exposure gives you access to different drivers and growth stories.

The takeaway here isn't that small caps will always outperform – it's that having exposure to companies of different sizes, alongside geographic diversification, gives your portfolio multiple ways to capture long-term growth as economic conditions shift.

(If you’re interested in the smaller growth stories, our General Investing portfolios include global small-cap exposure, while our Flexible Portfolios let you customise your allocations across different regions.)

📰 In Other News: Inflation stays boring – and that’s good for rate cuts

July's US inflation numbers landed exactly where everyone hoped – nowhere dramatic. Consumer prices rose 2.7% annually, matching expectations and keeping a September interest rate cut for the US Federal Reserve (the Fed) firmly in play. Markets are now pricing in a 94% chance of a cut next month.

Just as important is what didn't happen. Fears about tariff-related price spikes proved largely unfounded, at least for now. That's given the Fed breathing room to focus on other economic signals, particularly July's employment data, which showed clear signs of cooling. When you combine stable inflation with a softening labour market, you get the recipe for rate cuts.

Lower rates typically benefit companies by making borrowing cheaper and spurring growth. Bond markets are already pricing this in – short-term yields have fallen as investors expect near-term cuts, while longer-term rates remain higher, suggesting they still expect healthy economic growth down the road.

The bigger picture? Markets move on expectations as much as reality. Even if September doesn't deliver, the Fed's general direction towards looser policy is becoming clearer. For investors thinking in years rather than months, that trajectory matters more than any single meeting.

These articles were written in collaboration with Finimize.

🎓 Simply Finance: Market capitalisation

Market capitalisation, or "market cap", is simply the total value the stock market places on a company, calculated by multiplying its number of shares by its current share price. Think of it as the price tag if you wanted to buy the entire business. Companies are typically grouped into small cap (under US$2 billion), mid cap (US$2-10 billion), and large cap (above US$10 billion).