If you’re keeping an eye on the small-cap market, here’s a stat that might’ve made your coffee go cold.

The Russell 2000 Index, a popular benchmark for U.S. small-cap stocks, closed at 1,983.19 on May 6, 2025, down 1.1% for the day and a whopping 11.1% year-to-date.

What’s going on with small-cap stocks? Why are they underperforming in a year when tech companies and blue chips seem to be thriving?

The Russell 2000

For the uninitiated, the Russell 2000 Index tracks the performance of 2,000 small-cap companies across the U.S. These aren’t your Googles or Apples, they’re the up-and-comers, the scrappy players, and yes, sometimes the risky bets.

Small-caps are often seen as a window into domestic economic health.

When they’re thriving, it usually means Main Street is doing well. But when they stumble, as they are now, it could signal trouble under the surface.

Why Are Small-Cap Stocks Falling?

The 1.1% drop on May 6 isn’t a one-off. The Russell 2000 has been down 11.1% year-to-date.

That’s a sharp contrast to large-cap indices like the S&P 500, which have been holding up relatively well.

Here’s what’s dragging small-caps down?

Interest rate jitters. Small-cap companies tend to rely more on borrowing to grow. With interest rates still elevated and the Fed cautious about cuts, financing has gotten expensive.

Policy uncertainty. From tariffs to regulatory ambiguity, small businesses are more vulnerable to economic shocks than larger players with global buffers.

Profit margins under pressure. Unlike the big tech firms with billion-dollar war chests, small-caps can’t always pass rising costs onto customers, especially when consumer spending is shaky.

Should You Stay Away from Small-Caps?

Not necessarily. In fact, some investors see this as a buying opportunity.

Small-cap stocks are volatile, but that’s also where some of the biggest growth stories begin. The current dip might just be the “sale” alert long-term investors have been waiting for.

And don’t forget: when interest rates eventually come down (and yes, they will at some point), small-caps typically bounce back stronger than their large-cap cousins.