The Russell 2000 had its best month of the year while the other major indexes set all-time highs in August.
August marked the fourth straight month of gains for the major U.S. stock market indexes, but one asset class wildly outperformed all others – small caps.
The Russell 2000 index, which tracks the performance of small caps stocks, returned roughly 7% in August, its best month so far in 2025. It also brought the index into positive territory for the year, as it closed the month at 2,366—up 6.2% year-to-date.
While the other major indexes did not perform as well, they all set new all-time highs in August.
The S&P 500 returned 1.9% in August, finishing the month at 6,460. It set a new all-time closing high on August 28 when it reached 6,501.86. The S&P 500 is up 9.8% YTD as of August 31.
The Nasdaq Composite also had a solid month of August, rising 1.5% for the month to 21,455. It also set an all-time closing high on August 28, jumping to 21,705.16 before falling back on the final trading day of the month. The Nasdaq Composite is up 11.1 YTD.
The Dow Jones Industrial Average had a strong August, increasing 3.2% to 45,455. Again, August 28 was a record day for the Dow too, as it reached an all-time closing high of 45,636.90. The Dow is up 7.1% YTD.
Small cap outperformance could continue
Finally, midcaps also performed well in August, although not quite to the level of small caps. The S&P 400, which tracks midcap stocks, gained 3.3% in August to close the month at 3,254. The S&P 400 has gained 4.3% YTD.
With September upon us, small caps are well-positioned for continued outperformance. There is a lot of speculation that the Federal Open Market Committee (FOMC) will cut interest rates on September 16-17, and many pundits expect to see multiple more cuts over the next several months.
Rate cuts could benefit small caps more than any other equity asset class, as they would lower the borrowing costs for many companies that have held off on making investments to due to high interest rates.
Also, small cap stocks are undervalued relative to large caps, with valuation gap the widest it has been in 25 years. This could provide added fuel for small caps in the months ahead, as investors look for better values outside of overpriced large caps.
