Dovish Powell Boosts Small Caps, BofA and UBS Predict Outperformance

Small caps are expected to outperform after dovish comments from Fed Chair Jerome Powell, according to Bank of America and UBS strategists. The Russell 2000 Index has already gained 9% in three weeks, compared to a 3.2% gain in the Nasdaq 100 Index. Strategists point to a surge in earnings revisions for Russell 2000 companies and a rally in the sector. However, long-term performance remains uncertain, with some strategists cautioning that October has historically been a poor month for small-cap performance versus large caps.

Small-cap stocks are poised to outperform following dovish comments from Federal Reserve Chair Jerome Powell, according to strategists from Bank of America and UBS. The Russell 2000 Index, a benchmark for small-cap stocks, has already gained 9% in the past three weeks, outperforming the Nasdaq 100 Index, which rose by 3.2% during the same period [1].

The optimism is driven by Powell's remarks at the Jackson Hole economic symposium, where he indicated a potential interest-rate cut as soon as next month. Strategists at Bank of America and UBS believe this signals a favorable environment for small caps, particularly those that have lagged behind the broader market in recent months [1].

Jill Carey Hall, equity strategist at Bank of America, noted that the Russell 2000 is likely to lead large caps in the coming weeks, assuming no major economic surprises. UBS strategists, including Sean Simonds, echoed this sentiment, suggesting that small caps and low-quality stocks could continue to outperform as rate cuts alleviate balance sheet pressures [1].

The Russell 2000 Index has seen a surge in earnings revisions for its constituent companies, which has contributed to its recent rally. The sector has been trailing the broader stock market for months but has shown signs of recovery, posting its best week since July 2024 relative to the Nasdaq 100 before losing ground on Monday [1].

However, long-term performance remains uncertain. Lori Calvasina, head of US equity strategy at RBC Capital Markets, cautioned that the sector's outperformance could be short-lived. She remains neutral on small caps relative to large caps, warning that the economic concerns that opened the door for a September rate cut could persist [1].

Keith Lerner, co-chief investment officer at Truist Financial Corp., upgraded US small-cap stocks to neutral from "less attractive," citing improved earnings trends and technical signals. Despite the upgrade, the S&P Small Cap 600 is trailing large caps by 12% over the past year, offering investors a potential "catch-up opportunity" [1].

Investors should remain vigilant, as the difference between estimated and actual earnings growth for small caps is currently topping 12% for the quarter, the widest spread since the first quarter of 2022 [1].

References:

[1] https://www.bloomberg.com/news/articles/2025-08-25/bofa-ubs-see-small-cap-outperformance-as-powell-turns-dovish
[2] https://www.cbsnews.com/video/economist-mohamed-el-erian-says-jerome-powell-hasnt-looked-forward-enough-on-interest-rates/
[3] https://www.stocktitan.net/news/MFH/mercurity-fintech-expands-institutional-ownership-with-black-rock-72znqkgayuai.html