The US Federal Reserve lowered its benchmark interest rate by 25 basis points on Wednesday – marking its first rate cut since December 2024.
Ahead of the announcement, the CME FedWatch Tool demonstrated 96% probability of quarter-point reduction.
So, markets were bracing for a shift in monetary policy that could ripple across asset classes.
Historically, small-cap stocks have outperformed following rate cuts – especially those that come after extended pauses.
Russell 2000 – the index that tracks small US companies has already gained over 10% in the past three months, and experts believe the rally could accelerate after the rate cut.
Past easing cycles have delivered outsized returns for small caps, with gains often exceeding those of large-cap peers.
Why lower rates supercharge small-cap stocks
Small-cap stocks tend to be more sensitive to interest rate changes than their larger counterparts.
That’s because they often carry higher debt loads and rely more heavily on bank financing to fund operations and growth.
When borrowing costs decline, these firms see immediate relief in interest expenses, which can boost earnings and improve cash flow.
Plus, lower rates typically stimulate consumer demand and business investment – tailwinds that disproportionately benefit smaller, domestically focused companies.
Analysts note that small caps also tend to outperform during the early stages of economic recovery, when rate cuts begin to take effect.
With the Fed expected to ease further into 2026, the setup for small-cap outperformance looks increasingly favorable.
That said, following are the two small-cap stocks that stand to particularly benefit from Fed’s rate cut on Wednesday.
LCI Industries (NYSE: LCII)
LCI Industries, a supplier of components for RVs, marine vehicles, and manufactured housing, stands to gain meaningfully from lower interest rates.
The company has already expanded margins during a demand slowdown, and cheaper borrowing could fuel a rebound in discretionary spending on recreational products.
Experts believe that a dovish Fed could revive consumer confidence, driving incremental volume growth across LCI’s end markets.
Moreover, growing aftermarket business and a successful M&A strategy add further upside to LCII shares.
LCI Industries stock has already soared some 35% over the past five months – but a rather lucrative 4.61% dividend yield makes it an even more compelling small-cap name for investors looking to capitalise on rate-driven cyclical recovery.
Climb Global Solutions Inc (NASDAQ: CLMB)
Climb Global is another top small-cap stock that stands to benefit from the Fed’s expected rate cut on Wednesday.
The NJ-headquartered business specializes in disruptive technologies like cybersecurity, cloud infrastructure, and AI integration – sectors poised for expansion as borrowing costs decline.
Lower interest rates could accelerate enterprise tech spending, especially among mid-cap firms that rely on CLMB’s distribution network.
Climb Global has also been growing through strategic acquisitions, including its recent integration of Douglas Stewart Software.
With a 0.52% dividend yield and consensus buy rating from Wall Street analysts, Climb Global stock offers a compelling blend of growth, innovation, and rate-sensitive upside through the end of 2025.
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