Royce Q3 2025 Small-Cap Equity Factor Review: Micro-cap Stocks Shine, Deep Value Leads the Way

In Q3 2025, micro-cap stocks outperformed low volatility and dividend-paying stocks in the Russell 2000 universe, advancing 25.0% compared to 6.6% and 7.2% respectively. The Russell 2000 Index rebounded solidly, gaining 12.4% for the quarter. Royce Small-Cap Deep Value Index delivered the strongest results among the Royce indexes with a return of 11.6%.

In the third quarter of 2025, micro-cap stocks demonstrated notable strength within the Russell 2000 universe, advancing 25.0% compared to 6.6% for low volatility stocks and 7.2% for dividend-paying stocks. This robust performance was driven by more speculative names, which capitalized on market conditions and favorable monetary policies, as noted in a CoinEdition piece on 5 hidden gem altcoins.

The broader Russell 2000 Index rebounded solidly, gaining 12.4% for the quarter, underscoring the resilience of the small-cap segment. Among the Royce Multi-Factor Indexes, the Royce Small-Cap Deep Value Index delivered the strongest results, with a return of 11.6%, trailing the Russell 2000 Index’s 12.4% gain. This performance highlights the potential of deep value strategies in volatile markets.

The quarter saw the Russell 2000 Index surpass its prior peak from November 25, 2024, indicating a strong recovery from the market trough on April 8, 2025. The Royce Small-Cap Deep Value Index performed particularly well, rising 42.4% from the trough, while the broader Russell 2000 Index returned 39.3%. This suggests that deep value stocks, characterized by low valuations and high debt coverage, have significant upside potential.

The outlook for small-cap stocks remains favorable, with the Deep Value strategy poised to benefit further should the Federal Reserve adopt a more aggressive rate-cutting stance. The year-over-year growth rate of the true money supply remained slightly positive in Q3, signaling early signs of monetary easing. Additionally, the Small-Cap Dividend Value strategy stands to gain traction in the near term, given the current pace of monetary expansion.

Investors should closely monitor the performance of these factors and consider their alignment with their investment objectives. Past performance is no guarantee of future results, and historical market trends are not necessarily indicative of future movements. However, the strong Q3 performance of micro-cap stocks, particularly those with deep value characteristics, offers promising opportunities for investors seeking to capitalize on market volatility and favorable monetary conditions.