Markets Snap Out of Slump — Small Caps Rebound as Inflation Aligns with Expectations
(An SCN Editorial)

As markets closed the books on September 26, North American equities found footing after a three-day skid, with broad indexes rallying and small caps playing catch-up. With inflation data coming in largely as expected, investors regained a modicum of confidence that the Federal Reserve still has room to maneuver. That said, this rebound comes with caution—tariff headlines, credit markets, and earnings risks loom. Below is how the day unfolded, what it implies for small-cap investors, and what to watch going forward.

A Rebound, But Not a Blowout

By the end of trading, the S&P 500 had climbed roughly 0.6%, closing at 6,643.70, while the Dow Jones Industrial Average gained about 0.7%, and the Nasdaq added ~0.4%. Reuters+3AP News+3Reuters+3 The Russell 2000, representing small-cap names, advanced around 1.0%, clawing back part of its earlier losses. AP News

This rebound marks a break in the recent downtrend. All three major indexes had been under pressure over the prior sessions as inflation worries and hawkish commentary weighed on sentiment. Reuters+2AP News+2 Over today’s session, dip-buying and relief over inflation data helped reverse the tone. Bloomberg reported that a key inflation gauge matching expectations allowed equity markets a “breathing room” to stabilize. Bloomberg

Still, even with today’s bounce, the weekly picture is mixed: the S&P 500 is down about 0.3%, the Nasdaq ~0.7%, and the Russell 2000 ~0.6%. AP News The rebound dampened, but did not erase, the drag of the mid-week selloff.

Among notable movers, Kohl’s outperformed, rising ~1.1% after solid trading data. MarketWatch Intel, Boeing, and GlobalFoundries also contributed to strength in industrial and semiconductor sectors, partly driven by hopes for easing regulatory friction and supportive government policies. Reuters+2Barron’s+2 Meanwhile, Costco reversed earlier gains after weaker-than-expected same-store sales. Barron’s

In short: a modest, measured rebound—with underlying cautious optimism in play.

What Fueled Today’s Comeback

Inflation Alignment & Fed Expectations

The pivot point for the day was inflation. The August data came in largely in line with expectations, which alleviated fears that inflation is re-accelerating sharply. Bloomberg+3Reuters+3AP News+3 That allowed market participants to revisit the possibility that the Fed could continue with its more dovish tilt—though not aggressively so. Schwab analysts noted that even with a 0.3% month-over-month increase in inflation, the data still support a Fed bias toward cutting rates. Schwab Brokerage

It’s important to stress: matching expectations is not the same as beating them. Investors remain sensitive to how the Fed frames future actions in response to inflation trends. Any surprise upside or hawkish tone could reverse optimism.

Small-Cap Reclaiming Some Momentum

Small caps, which had lagged earlier in the week, appear to be making up lost ground. The Russell 2000’s ~1.0% gain today outpaced the broader index moves, signaling renewed interest in riskier, more cyclically oriented equities. AP News

This is consistent with recent narrative: small caps have been outperforming over the past month and quarter, driven by rate-cut expectations and valuation tailwinds. Reuters+4Investors+4MarketWatch+4 In fact, earlier this month, the Russell 2000 had notched a record closing high—its first since late 2021—underscoring the strength under the surface. Reuters+3MarketWatch+3Investopedia+3

That said, small-cap stocks remain more vulnerable to macro surprises—especially rising yields or credit stress. Their balance sheets are often less robust, and many rely more heavily on debt financing.

Tariff Headlines & Policy Risk

While inflation and rate expectations set the tone, tariffs remain a wild card. On Friday, President Trump unveiled sweeping 100% tariffs on branded pharmaceuticals and other goods, which rattled some sector-specific names. AP News+3Reuters+3Barron’s+3 The broader market seemed to absorb these for now, but if trade tensions escalate, targeted pressure could flow into sectors such as healthcare, materials, and industrials.

Also worth noting: analysts flagged that some firms may have delayed price hikes due to inventory build-ups, so underlying price pressure could still emerge if inflationary inputs reassert themselves. Reuters

Dip Buyers & Technical Support

Technically speaking, today’s rebound benefited from dip buyers stepping in near support levels, especially in index ETFs and large-cap names, which in turn helped pull up broader sentiment. Bloomberg+2AP News+2 The bounce was orderly rather than euphoric, suggesting institutional participation rather than panicked short-covering.

Small Caps: Cautious Optimism

For those focused on small- and mid-cap equities (a key audience for SCN), today offered some encouragement—but with caveats.

Strengths

Valuation room: Many small-cap names still trade at discount-to-historical multiples relative to large caps, giving them room for multiple expansion if sentiment turns. Investopedia+2Barron’s+2

Earnings recovery: Analysts expect small-cap earnings to grow at a faster clip than large caps over the coming quarters, assuming macro stability. Investors+2Barron’s+2

Liquidity sensitivity: Smaller companies tend to benefit more from lower interest rates (less cushion for debt), so further rate cuts could disproportionately help them. Investopedia+2Barron’s+2

Risks

Volatility & dispersion: Small-cap universes are more prone to divergence—some will soar, others will crash. Selectivity is critical.

Credit & funding stress: If credit conditions tighten or yields rise, small-cap firms with higher leverage may suffer disproportionately.

Macro surprises: Surprises in inflation, Fed policy, or trade will hit small caps harder than large, diversified names.

The takeaway: small caps offer upside potential in the current environment, but only for those who do their homework and manage exposure carefully.

Themes to Watch & What’s Next

As SCN’s editorial team looks ahead, here are the key themes and catalysts we believe will define the near-term trajectory:

Upcoming inflation prints (PCE / core PCE) — Any upside surprise may spook the market, especially given current valuations.

Fed commentary & rate path clarity — Investors will parse speeches from Fed officials carefully for shifts in tone or revisions to dot plots.

Earnings season surprises — Big-cap earnings will set the tone, but small-cap guidance could trigger new rotation flows.

Tariff / trade developments — Further escalation or clarification on tariff plans could inject volatility, especially sector by sector.

Breadth & rotation indicators — Watch whether the market can broaden beyond mega-cap tech, with leadership rotating to cyclicals, industrials, and financials.

Credit markets & yield spikes — Any stress in credit or sudden rise in Treasury yields may prompt a pullback, especially for small caps.

Another caution flag: Goldman Sachs recently warned that while markets have been calm, October could bring renewed volatility given seasonality and policy catalysts. The Economic Times

Final Word

As of September 26, 2025, the market is showing signs of resilience. The rebound helps soothe near-term concerns, and small-cap stocks are nudging back into the spotlight. But make no mistake—this is not a runaway bull surge. It’s more of a measured pivot.

For SCN readers and retail investors, the environment calls for balanced exposure: maintain core holdings in high-quality large caps while selectively rotating into fundamentally strong small-cap names. In small caps, favor those with stable cash flows, low leverage, and management teams with credibility. Monitor macro and policy signals closely—especially inflation and Fed guidance—as the difference between continued upside or a sharp reversal may depend on just a few data points.

This rebound is welcome, but it’s just a chapter—not the story’s end. Markets remain in a delicate dance, and the players (inflation, the Fed, credit trends, trade) are as unpredictable as ever. Stay nimble. Stay vigilant. Stay informed.