The Russell 2000 index of small US companies fell about 7.5% in the third quarter of 2026, including a drop of more than 5% in September, while the S&P 500 rose 2%, CNBC reported [1][7]. That reversed a historic first half, in which the Russell 2000 gained close to 20%, its best first half since 1991 [4]. The main cause was interest rates: the 10-year Treasury yield rose from 4.44% to 5.29% during the quarter, and the Federal Reserve raised its target range to 3.75% to 4.00% on September 16 [5]. Even so, small caps were still up more than 12% for 2026 at the end of September [1].
How badly did small caps lag in Q3 2026?
The Russell 2000 tracks about 2,000 smaller US companies, typically worth from a few hundred million to several billion dollars. It turned from leader to laggard within weeks.
| Date | Russell 2000, 2026 to date | S&P 500, 2026 to date | Source |
|---|---|---|---|
| End of June | close to +20% | +9.6% (first half) | CNBC [4]; DataPorium [8] |
| Start of September | +20% | +13% | CNBC [3] |
| September 24 | +14% | n/a | CNBC [3] |
| September 30 | more than +12% | +11.8% | CNBC [1][7] |
Source: CNBC market reports and the DataPorium first-half review [1][3][4][7][8]. Index levels are not available in DataPorium data, so changes are as reported by CNBC; S&P 500 year-to-date change is calculated from its 2025 close of 6,845.50 and September 30 close of 7,651.54.
By September 29, the Russell 2000 had underperformed the S&P 500 by more than 9 percentage points in the quarter, the largest gap since the first quarter of 2020, when it lagged by nearly 11 points, CNBC reported [2]. With the final numbers, the gap was about 9.5 points: a decline of about 7.5% against a 2% gain [1].
How did small caps get here in 2026?
Small caps have been the most volatile part of the US stock market this year. On March 20, 2026, three weeks after the war with Iran began, the Russell 2000 became the first major US index to enter a correction, a decline of more than 10% from a recent high; CNBC noted that small caps are especially sensitive to oil prices and to a slowing economy [10]. They then rallied through the second quarter to their best first half since 1991 [4]. A DataPorium article in July explained why small caps were winning at that point [8]. The third quarter reversed much of that relative gain.
Why did small caps fall when yields rose?
More borrowing, more floating-rate debt
Smaller companies rely more on bank loans and other floating-rate debt than large companies, which tend to borrow through long-term fixed-rate bonds. When short-term rates rise, small companies' interest bills rise quickly. The 2-year Treasury yield, which tracks expected Fed policy, rose from 4.14% on June 30 to 4.88% on September 30, DataPorium data show [5]. The Fed's minutes said financing conditions were "somewhat restrictive" for small businesses and that credit "appeared to be somewhat tight for private credit loans and small businesses" [6].
Strong correlation with bond prices
In September, small caps traded almost like a bond fund. CNBC reported on September 24 that the correlation between the iShares Russell 2000 ETF (IWM) and a long-term Treasury bond ETF was 0.51, against 0.29 for an S&P 500 fund and 0.1 for a Nasdaq-100 fund, and that the correlation between small caps and the price of the 10-year note had touched a one-year high above 0.97 [3]. "Small caps have had a more difficult time adjusting to the Fed's hawkish turn and continued increase in rates at the long end," said Kevin Gordon of the Schwab Center for Financial Research, noting that their negative correlation to the 10-year yield was twice that of large caps [3].
Fewer AI winners
The large-cap index is dominated by technology companies whose earnings are rising with spending on artificial intelligence. The S&P 500 technology sector returned 7.2% in the third quarter, and the Fed's minutes noted that companies benefiting directly from AI investment outperformed [6][9]. The Russell 2000 has a much smaller weight in those companies and a larger weight in banks, industrials and other rate-sensitive businesses.
Are small caps cheap after the drop?
The case for small caps rests on earnings. In July, State Street's Matt Bartolini told CNBC that more analysts were raising small-cap earnings estimates than cutting them and that all 11 small-cap sectors were outperforming their large-cap counterparts, something that had not happened in more than 30 years [4]. In September, Schwab's Gordon said that "forward earnings estimates for small caps continue to look solid," consistent with improving manufacturing surveys and growth data [3].
The risk is that rates keep rising. Gordon also said there was "probably some more weakness to come if rates continue to move higher" [3]. Options traders were positioned for that: on September 24, more puts than calls traded in IWM, and open interest in puts was close to 7 million contracts [3]. These are signs of hedging and short-term views, not forecasts.
What are the key numbers for small-cap investors?
| Indicator | June 30, 2026 | September 30, 2026 |
|---|---|---|
| Federal funds target range | 3.50% to 3.75% | 3.75% to 4.00% |
| 2-year Treasury yield | 4.14% | 4.88% |
| 10-year Treasury yield | 4.44% | 5.29% |
| High-grade 10-year corporate bond yield (monthly average) | 5.18% (June) | 5.77% (September) |
Source: DataPorium Interest Rates [5].
Every one of these borrowing costs rose during the quarter. For small companies that need to refinance debt in the next year or two, the cost of new money has risen sharply; the 10-year Treasury yield closed at 5.31% on October 5, its highest since 2002 in the Treasury's daily data [5].
The Russell 2000 fell about 7.5% in Q3 2026 while the S&P 500 rose 2%, the widest quarterly gap since early 2020, as rising rates hit smaller, more indebted companies.
Frequently asked questions
How much did the Russell 2000 fall in Q3 2026?
The Russell 2000 fell about 7.5% in the third quarter of 2026, CNBC reported, after a drop of more than 5% in September [1].
Why do small caps fall when interest rates rise?
Smaller companies carry more floating-rate and short-term debt, so their interest costs rise faster, and they have less exposure to the large technology companies driving earnings growth. In September 2026, small caps moved closely with bond prices [3][6].
Are small caps still up in 2026?
Yes. Despite the third-quarter decline, the Russell 2000 was up more than 12% for 2026 at the end of September, slightly ahead of the S&P 500 [1].
What was the Russell 2000's first-half 2026 performance?
The Russell 2000 rose close to 20% in the first half of 2026, its best first half since 1991, CNBC reported [4].
Sources & References
- [1] CNBC, Stock market news for Oct. 1, 2026 (Russell 2000 quarterly performance)
- [2] CNBC, Small-cap stocks are underperforming by the largest margin since 2020 (September 29, 2026)
- [3] CNBC, Bond liquidation wrecks small caps. Here's how bad some traders see it getting (September 24, 2026)
- [4] CNBC, Not a junk rally - how to trade the strongest small-cap stock market in three decades (July 16, 2026)
- [5] DataPorium Interest Rates (Treasury yields, corporate bond yields and Fed decisions)
- [6] Federal Reserve, Minutes of the FOMC, September 15-16, 2026
- [7] CNBC, S&P 500 falls Wednesday despite softer-than-expected inflation data; index posts losing September (September 30, 2026)
- [8] DataPorium article, Russell 2000 vs S&P 500 in 2026: why small caps are winning (July 17, 2026)
- [9] First Trust Portfolios, The Only Constant is Change (S&P 500 sector total returns, Q3 2026)
- [10] CNBC, Small cap-focused Russell 2000 becomes first U.S. benchmark to enter correction territory (March 20, 2026)
