In a strong showing Tuesday, North American markets held near all-time highs, with small-cap stocks emerging as one of the most notable stories. The Russell 2000 is pushing into fresh territory, while the Toronto Stock Exchange (TSX) found support from a rally in gold miners and rising commodity prices. But beneath the surface, mixed economic data and looming policy decisions suggest caution is not yet out of season.

TSX Climbs on Gold, Weak Raw Material Prices

Canada’s S&P/TSX index futures ticked up about 0.2%, building on gains from previous sessions that were led by strength in the gold mining sector. Reuters Gold reached new record highs as investors anticipate more accommodative policy from central banks, particularly in light of softer inflation and concerns about the labor market. Reuters+1

Some of the key data out of Canada showed that raw material prices fell 0.6% in August, while producer prices rose 0.5%, lifted mainly by food and chemicals. Reuters Combined with a recent rate cut by the Bank of Canada, and hints that financial institutions may see relaxed capital rule scrutiny, the macro setup looks supportive for resource and commodity-linked small and mid-caps. Reuters

U.S. Markets Near Records; Small Caps Take the Lead

On the U.S. side, the S&P 500 has now logged 28 record highs in 2025, and indices such as the Dow and Nasdaq continue to hover near or at all-time levels. Newswire+2AP News+2 But the riskiest upside appears to be showing up in smaller-capitalization stocks. The Russell 2000 — which tracks small U.S. companies — broke out to new highs for the first time since November 2021, rising some 2.5% in the prior session and outpacing many large-cap peers. MarketWatch+1

Investors are increasingly fixated on expectations for further interest rate cuts, which tend to favor smaller firms that often carry more debt and have less pricing power. MarketWatch+2Investopedia+2 Earnings for small-caps have also surprised on the upside lately, giving more credibility to the argument that this is more than just a short-term rotation. MarketWatch+1

Headwinds: Inflation, Fed Talk & Valuation Risks

Despite the strong momentum, there are several reasons why some market watchers are urging caution. Foremost among these is inflation — while certain measures are cooling (e.g. raw materials), others (especially in food and energy) are not, which could complicate expectations for rate cuts. Reuters+1

Fed Chair Jerome Powell’s upcoming remarks will be closely watched, as markets try to gauge whether the recent rate cut was the beginning of a trend or a temporary reprieve. Investopedia Moreover, Treasury yields have shown signs of creeping back up, which could put pressure on smaller companies with less capacity to absorb higher borrowing costs. Valuations in some small-cap cohorts are also stretching, especially when compared to long periods of underperformance. MarketWatch+1

Small-Cap Highlights & Undervalued Gems

Amid the broader rally, several U.S. small-cap names are drawing attention for potential undervaluation, especially those with insider buying. For example:

Burke & Herbert Financial Services (BHRB) has seen recent insider purchases and holds a relatively low P/E ratio compared to some peers. Simply Wall St

Peoples Bancorp, another regional bank, also appears on the list of “undervalued with insider action.” Simply Wall St

A handful of other small-cap names in industrials, finance, and specialty healthcare are similarly getting picked over by investors seeking returns that may not rely on megacap tech. Simply Wall St+2Morningstar+2

In Canada, smaller miners and resource producers stand to benefit from the gold rally, plus any easing in regulatory and capital requirements. Though Canadian small caps tend to be more volatile, the upside is increasingly well recognized among foreign and domestic investors. Reuters

Outlook & What to Watch

With small caps surging, the market now faces several inflection points:

Fed & BoC Policy Moves — If additional rate cuts are delivered (especially if earlier or more aggressive than expected), small caps are likely to benefit. But a surprise hawkish tilt could reverse gains quickly.

Inflation Readings — Key inflation reports (including PCE in the U.S.) will be closely scrutinized. Stickiness in inflation — particularly in food, energy, or labor costs — could undermine expectations for easing.

Earnings Reports — Small companies’ earnings tend to have more dispersion. Outperformance in certain sectors could reinforce the small-cap rally; any disappointment might erode confidence.

Valuations & Risk — As small caps rally, valuations are creeping up. Investors will need to balance upside potential with risks from higher borrowing costs, geopolitical uncertainty, and supply chain disruptions.

Sectoral Breadth — For the rally to be sustainable, it will need to broaden beyond gold miners and banks to include industrials, consumer discretionary, specialty materials, etc. So far signs are positive but mixed.

Bottom Line

Today’s market action suggests that small caps are no longer playing second fiddle: they’re assuming a leading role in the current advance. With gold making fresh highs, commodity-linked sectors pushing forward, easing policy expectations, and a generally favorable earnings backdrop, there’s substantial momentum behind this move.

That said, the path forward won’t be entirely smooth. Inflation, central bank behavior, and valuation risk are real obstacles. For those willing to accept volatility, small-caps may offer outsized returns in the near-term — but risk management and selectivity will matter even more than usual.