Good morning, investors. Last night, President Trump posted a letter online that said he had determined there was “sufficient cause” to remove Fed Governor Lisa Cook from her position, alleging that she submitted fraudulent mortgage applications. This is a developing story.
This morning, we’re turning to the investors who have been holding out for a small-cap rally. They may finally get their roses.
Comeback season
No corner of the market stands to benefit from Fed rate cuts as much as small-cap stocks.
The rate-sensitive bunch — as tracked by the Russell 2000 — has lagged the tech-heavy Nasdaq Composite all year. But falling borrowing costs could catalyze a short-term reversal, according to Bank of America.
Small-caps today have much higher refinancing risk than years past, Bank of America strategists said.
Nearly half of these companies’ debt is short-term or floating rate, with far more debt coming due over the next several years compared to their large-cap peers.
If interest rates don’t change, the bank estimated that refinancing costs could eat 42% of small-cap operating earnings over the next five years.
If the Fed makes 100 basis points of cuts, that hit could shrink to 35%.
That setup makes the immediate outlook look particularly favorable, and markets have positioned accordingly.
Currently, more than three-quarters of small-caps trade above their 50-day moving average — a higher share than large- and mid-caps.
Small-cap stocks are showing signs of momentum (Chart courtesy of Exhibit A)
Markets are betting that can still improve.
As of Monday, traders on the prediction platform Kalshi see 72% odds for a rate cut in September. Meanwhile, data from CME shows an 84% likelihood.
Source: Kalshi
Yet while small-caps historically have rallied in the months after the first rate cut of a cycle, that fades if strong earnings don’t follow.
It’s worth noting, too, that small-caps are just emerging from one of their worst returns relative to large-caps in two decades.
High interest rates have throttled small-caps in recent years (Chart courtesy of Exhibit A)
“Whether or not we see sustained outperformance of small caps beyond an initial Fed-induced rally is likely to depend on the fundamental backdrop,” Bank of America strategists wrote in a Monday note.
Market snapshot
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Elsewhere
🇺🇸The US is the single biggest investor in Intel. The government took an $8.9 billion stake in the company at $20.47 per share, or about a 9.9% position. Intel said the government’s role will be passive, with no board seat or information rights. (Barron’s)
📊 There are now more ETFs than individual stocks in the US. The boom in new funds has led to more than 4,300 ETFs for investors to choose from, a figure exceeding the roughly 4,200 total stocks for the first time ever, according to Morningstar data. (Bloomberg)
📉 Sydney Sweeney won’t save American Eagle from tariffs. That’s according to Bank of America strategists, who said the retailer’s pricing power remains limited even with viral marketing. The bank downgraded the stock to “underperform” from “neutral,” and shares dipped 3%. (Sherwood News)
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Rapid-fire
Nvidia announced its new “robot brain” on sale for $3,499 (CNBC)
More US consumers with high credit ratings are starting to miss debt repayments (Reuters)
Furniture stocks declined after Trump floated the idea of new tariffs on the industry (WSJ)
Trump signaled that the US could see “many more cases” of taking stakes in tech firms (Yahoo Finance)
Warren Buffett isn’t planning to buy another railroad company (CNBC)
Palantir CEO Karp sold more than $60 million in stock (Barron’s)
Nearly half of investors with 401(k) plans are interested in including private equity in their retirement accounts (Yahoo Finance)
Elon Musk’s xAI sued Apple and OpenAI for their “anticompetitive scheme” to thwart AI rivals (CNBC)
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Last thing
BREAKING: PRESIDENT TRUMP HAS FIRED FED GOVERNOR LISA COOK.
No sitting U.S. president has ever fired a Federal Reserve Board Governor.
This is a first.
— #amit (#@amitisinvesting)
12:11 AM • Aug 26, 2025
About me
📰 I’m Phil Rosen, co-founder and editor-in-chief of Opening Bell Daily. I’ve published books, lived on three continents, and won awards for my journalism, which has appeared in Business Insider, Fortune, Yahoo Finance, Bloomberg and Inc. Magazine.
I write our flagship newsletter to prepare you for each trading day — unpacking markets, economic data and Wall Street with analysis you won’t find anywhere else.
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