SCN Market Brief — September 22, 2025

1) Setting the Stage

As North American markets opened this Monday, the tone was cautiously optimistic. The glow from last week’s coordinated Federal Reserve and Bank of Canada rate cuts hasn’t fully faded, and investors remain focused on whether easing can support growth through year-end. The broader indices continue to hover near all-time highs, led by tech and semiconductors. But small caps, while lifted, are still struggling to establish durable leadership.

For retail investors, this landscape carries both opportunity and risk. The policy environment is friendlier, but fundamentals remain uneven, and market breadth has yet to confirm a full rotation into small-cap territory.

2) Policy Backdrop: Tailwinds with Caveats

The Fed’s 25-basis-point cut last week was the first in over a year, following months of elevated rates designed to tame inflation. Chair Jerome Powell made clear that the Fed is not racing into an aggressive easing cycle, but rather walking a measured path. Inflation data continues to cool modestly, while labor market metrics — including rising jobless claims and slower payroll gains — suggest softness.

In Canada, the Bank of Canada mirrored the Fed’s move, dropping its key policy rate to 2.5%, the lowest level since early 2022. Governor Tiff Macklem emphasized that more cuts may follow if disinflation continues, but warned against complacency.

The result? Investors now expect at least one additional cut by year-end in both the U.S. and Canada. That expectation is buoying equities, even as bond yields remain volatile.

3) Big Caps & Sector Leaders

Large caps remain the market’s anchor, with several key themes standing out:

Tech & Semiconductors: Last week’s blockbuster announcement of Nvidia’s $5 billion co-investment in Intel to expand data-center chip capacity continues to ripple across the sector. Intel shares surged nearly 30% in a matter of days, while other semiconductor suppliers — from Applied Materials to Lam Research — followed. Today, momentum cooled slightly, but semis remain firmly in the spotlight.

AI & Cloud Leaders: Microsoft, Amazon, and Alphabet all extended gains. Investors continue to price in growth from AI-driven infrastructure and enterprise adoption, now further supported by a friendlier interest-rate environment.

Financials & REITs: Banks and mortgage-sensitive REITs are seeing steady inflows. Rate cuts lower funding costs, ease pressure on loan books, and improve refinancing conditions. Regional banks, in particular, are catching a bid as investors hunt for bargains.

Consumer Discretionary: Retail sales have held up better than feared, though margins remain under pressure. Auto names continue to lag, reflecting demand softness and inventory challenges, but select specialty retailers are performing.

4) Small Caps: Waiting for a Breakout

The Russell 2000 and S&P SmallCap 600 both gained modestly today, but again underperformed the S&P 500 and Nasdaq. This has become a recurring theme: small caps react positively to macro tailwinds, but then stall before confirming leadership.

Why the hesitation?

Debt Exposure: Many small-cap firms carry higher leverage and more floating-rate debt. Rate cuts help, but the relief isn’t instantaneous — refinancing windows still lie ahead.

Earnings Visibility: Margins remain thin in many sectors, particularly consumer-facing small caps and industrials with supply-chain sensitivities. Investors want to see progress in Q3 earnings before piling in.

Liquidity Concerns: Trading volumes in small caps remain subdued. That means sharper swings in both directions, which keeps institutional buyers cautious.

Where the opportunities lie:

Regional Banks & Financials: Direct beneficiaries of easing policy, particularly those with improving credit metrics.

Energy & Resources: Canadian small caps in energy and mining saw a bid today, reflecting both policy relief and firm commodity prices.

Biotech & Healthtech: Speculative but increasingly active. Companies with FDA milestones or strong clinical data are finding retail enthusiasm, though risks remain high.

The takeaway? Selectivity matters. The days of buying the entire small-cap index for blanket exposure may not deliver the best risk-adjusted returns. Instead, fundamentals and catalysts should drive positioning.

5) Market Stories of the Day

Intel-Nvidia Alliance Still Dominates: Analysts continue to digest the partnership’s implications. The move underscores the capital intensity of AI infrastructure and raises questions about which small-cap suppliers may capture downstream demand.

TSX Edges Higher: Canadian markets gained modestly, with rate-sensitive sectors like consumer discretionary and financials leading. Energy small caps also found traction, helped by steady oil prices.

Earnings Watch Begins: With Q3 earnings season approaching, investors are sharpening pencils. Many small caps are entering with low expectations — meaning positive surprises could drive outsized gains. Conversely, misses will be punished harshly.

6) Technicals & Market Sentiment

S&P 500: Trading near record highs, fueled by Big Tech. Momentum remains strong, but RSI indicators suggest near-term overbought conditions.

Russell 2000: Hovering just below key resistance at 2,060. A breakout with volume would confirm leadership; repeated failures risk cementing underperformance.

Options Activity: Put-call ratios in small caps remain elevated, signaling hedge activity. Investors are participating, but cautiously.

7) Retail Investor Strategy

For retail investors, today’s environment calls for balance:

Anchor with Stability: Large-cap exposure, particularly in tech and financials, provides ballast.

Lean Into Select Growth: Mid-caps and small-cap leaders with real catalysts (earnings growth, partnerships, product launches) can complement the core.

Speculate Wisely: Treat speculative small caps as satellites — position sizes should be modest, with clear stop-loss levels.

Diversify Across Regions: Canadian small caps in energy, mining, and banking may benefit earlier from BoC’s policy path.

Stay Data-Aware: Each inflation print, jobs report, and central bank comment matters. Rate cuts help, but macro uncertainty persists.

8) What’s Next on the Radar

Powell’s Follow-Up Speeches: Any tone shift could reframe expectations about additional cuts.

Inflation Reports (U.S. & Canada): Core CPI and PPI data will determine whether policy easing continues.

Earnings Season Kickoff: Early reports from financials and consumer names will set the tone for Q3.

Fund Flows: Watching ETF inflows into small-cap funds will provide a key signal about institutional sentiment.

Geopolitical Watch: Trade and regulatory risks, particularly around semiconductors and cross-border flows, remain potential spoilers.

9) Bottom Line

Markets on September 22, 2025, are at a crossroads. The rate-cut backdrop provides relief, Big Tech continues to dominate, and semiconductors are enjoying a renaissance. But small caps are still waiting for confirmation.

For investors, this creates a dual-path market: safe, steady exposure in large caps and targeted bets in select small-cap winners. The cautious optimism is warranted, but blind enthusiasm is not. Those who focus on fundamentals, diversify exposure, and treat speculative plays as optional satellites stand to benefit most from this transition phase.

At SCN, our editorial stance is clear: quality first, catalysts second, speculation last. Small caps may not be leading yet, but the groundwork for their turn is being laid — and selective investors could be rewarded when the baton finally passes.

By SCN Editorial Team
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