September 5, 2025

1. Market Snapshot

North American equity markets rallied modestly today. Key U.S. indices saw solid gains:

S&P 500 rose by 0.8%

Nasdaq Composite added approximately 1.0%

Dow Jones Industrial Average gained around 0.8%
These moves were supported by easing concerns over inflation and renewed investor optimism following dovish signals from central banks.
StockAnalysis

Across the border, Canada’s TSX Composite climbed roughly 0.57%, buoyed by strength in resource and financial stocks amid the nation’s strategic pivot toward internal growth.
Barron’s

2. Small-Cap Spotlight: U.S. Gains Ground

The Russell 2000, representing U.S. small-cap stocks, edged up 1.26%, tracking a broader trend where these smaller companies are gaining steadily.
StockAnalysisSmall Caps

In August, small-cap equities surged 7%, outperforming the S&P 500, which rose about 2%. This rally brings small caps within roughly 4% of their November 2021 highs.
Reuters

Investors are attributing the momentum to improved small-cap earnings—expected to rise about 69% year-over-year—and the prospect of interest rate cuts, which particularly benefit smaller firms more dependent on borrowing.
ReutersBarron’s

Moreover, small caps are trading at a valuation discount of roughly 26–30% compared to large-cap benchmarks, adding to their allure.
Barron’sMarketWatch

3. Canada’s Strategic Shift Boosts Markets

Canada, reeling from a 1.6% GDP contraction in Q2 2025, is embracing a renewed economic strategy aimed at long-term resilience. The government is focusing on bolstering infrastructure, energizing domestic resource development, and enhancing internal trade across provinces.

Prime Minister Mark Carney’s initiative includes $130 billion in public investments over four years and a further $500 billion in private sector commitments over five years.
Barron’s

As a result, investors are positioning around mining, energy, and financial sectors. Standout names include Royal Bank of Canada, Enbridge, Alamos Gold, and Lassonde Industries, with ETFs like iShares MSCI Canada gaining renewed interest. In USD terms, the TSX Composite is up 21% so far this year.
Barron’s

4. Small-Cap Investment Themes: What’s Rallying and Why

Value vs Speculation?
Small-cap strategies with fundamental strength are showing promise. Managers recommend value-focused small caps—particularly profitable ones—as more sustainable plays. Examples include Evercore, AAON, Advance Auto Parts, Yeti, and ESAB.
Barron’s

By contrast, caution is warranted in speculative territories. Veteran investors such as Mark Cooper from MAC Alpha Capital see long-term upside in international small-cap value stocks, especially given the high valuation of the S&P 500. Yet, he warns against unprofitable companies with extreme valuations (PS ratios over 10), which remain vulnerable.
MarketWatch

Fund Flows & ETFs
Small-cap value ETFs rallied strongly in August, gaining 7.7% and adding to the year-to-date performance. Investors are rotating into lagging yet undervalued segments.
Investors

Analysts at Bank of America also view small- and mid-cap stocks as appealing contrary positions, given mega-cap valuations are nearing dot-com bubble highs.
Business Insider

5. Analyst Insights and Market Color

The small-cap revival may be more than a short-lived pop. As Royce Investment Partners suggests, the ongoing rate cut cycle could ignite a “stealth summer” for small caps, led by value and quality.
Barron’s

That said, macro risks persist. Wells Fargo recently downgraded small-cap equities due to concerns over tepid economic growth through 2026. If growth disappoints or monetary policy holds firm, large-cap dominance could reassert itself.
Reuters

In Canada, the shift toward internal investment is a structural story, not just cyclical—meaning yield in sectors like energy, materials, and financials may persist beyond short-term sentiment.
Barron’s

6. What to Watch Next

Fed & ECB signals – Interest rate policy will be pivotal. An actual cut could ignite further small-cap gains.

August jobs data – A weaker-than-expected report—especially in non-farm payrolls—could accelerate rate easing expectations.

Earnings flow – Small-cap earnings will need to hold up post-Q2 to sustain momentum.

TSX performance – If Canada’s pivot continues to show results in earnings or cash flows, investor confidence could deepen.

Value vs growth rotation – Watch whether small-cap value maintains leads as macro sentiment shifts.

7. Bottom Line

Today’s market narrative is one of rotation and recalibration. U.S. small caps are narrowing gaps with megacaps amid rate cut optimism and attractive valuations. Fund managers are leaning into value and international small caps as compelling longer-term plays.

Meanwhile, Canada’s long-term infrastructure and resource push is reshaping market structure, supporting sector leadership and backing TSX performance.

For retail investors, this is a moment to balance strategic value exposure in small caps with macro risk awareness. Blend ETFs for value (like SPDR S&P 600 or Avantis US Small Cap Value), monitor earnings consistency, and stay attuned to central bank tone.

By SCN Editorial Team
No AI was used in crafting this newsletter.
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