After a long period of underperformance, small-cap U.S. stocks may be staging a comeback. While it's too early to say for sure whether this is the start of a sustained rally or just an occasional rise, recent data shows encouraging signs for small-cap investors.

The small-cap index iShares Russell 2000 has gained 11% over the past three months (as of Sept. 25, 2025) versus about 7.6% gains in the S&P 500. However, iShares Russell 2000 ETF (IWM Quick QuoteIWM - Free Report) (up 8.2%) still lags SPDR S&P 500 ETF Trust (SPY Quick QuoteSPY - Free Report) (up 12.6%) when the year-to-date performance is considered.

Much of the early-year weakness in small caps was caused by President Trump’s announcement of higher tariffs in April, which hit hard the smaller companies.

Fed Rate Cut Fuels Small Caps?

The Fed cut interest rates by 25 bps in September and hinted at two more cuts this year.There is a 87.7% chance (at the time of writing) of a 25-bp rate cut in October, per the CME FedWatch Tool.

A softer labor market will probably lead the Fed to consider this path. The start of the continued monetary easing cycle (if there is any) is a great plus for small-cap stocks and ETFs (read: Fed Cuts Rates & Hints at Two More Cuts in 2025: ETFs to Play).

Upbeat U.S. GDP Growth

Thanks to stronger consumer spending, the U.S. economy grew at an unexpectedly robust 3.8% pace in Q2 of 2025, marking an upward revision of second-quarter growth released by the government.

The Commerce Department said Thursday that gross domestic product (GDP) bounced back in the spring after a 0.6% decline in the first quarter, which had been hit hard by trade tensions. The new estimate is higher than the previously reported 3.3% growth (per AP news, as quoted on Yahoo Finance).

As small-cap stocks are closely tied to the domestic economy, an upbeat U.S. economic growth is favorable for the pint-sized stocks.

What Does Small-Cap Stock Valuation Say?

Per WSJ data, the Russell 2000 is currently trading at a P/E ratio of 34.65 (as of Sept. 19, 2025), versus the year-ago level of 25.12. The Russell 2000 is trading higher than the Nasdaq 100.

The Nasdaq 100 Index is trading at a P/E ratio of 32.65X, above the year-ago level of 30.92X, per the Wall Street Journal data. In comparison, the S&P 500 Index traded at a P/E ratio of 25.30X, up from the year-ago level of 23.98. It shows that small caps are not cheap, if not extremely overvalued.

Winning Small-Cap ETFs in Focus

Here are a few small-cap U.S. ETFs that have topped the list in their segment in Q3. Investors can keep a close track of these ETFs as they are in high momentum.

Fidelity Enhanced Small Cap ETF (FESM Quick QuoteFESM - Free Report) – Up 15.5% over the past three months (as of Sept. 25, 2025).

Invesco S&P SmallCap 600 Pure Value ETF (RZV Quick QuoteRZV - Free Report) – Up 14%

Vanguard Russell 2000 Value ETF (VTWV Quick QuoteVTWV - Free Report) – Up 13.6%

First Trust Small Cap Core AlphaDEX ETF (FYX Quick QuoteFYX - Free Report) – Up 13.5%

Janus Henderson Small Cap Growth Alpha ETF (JSML Quick QuoteJSML - Free Report) – Up 13.4%

iShares Russell 2000 Growth ETF (IWO Quick QuoteIWO - Free Report) – Up 13%

Any Wall of Worry?

In a trio of posts on Truth Social on Sept. 25, 2025, President Trump announced that the United States will roll out a host of tariffs starting Oct. 1. The measures will cover imported kitchen cabinets, bathroom vanities, pharmaceutical products, and heavy trucks, though exemptions will apply to drugmakers currently building manufacturing plants in the United States, as quoted on Yahoo Finance. This return of tariff tensions may keep small-cap stocks volatile in the short term.