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Small-cap stocks are outperforming broader markets in September 2025, signaling a shift in investor sentiment toward undervalued and domestically focused companies. The Morningstar US Small Cap Index rose 4.58% in August, outpacing both mid-cap and large-cap benchmarks. This momentum continues into September, driven by expectations of monetary easing and favorable valuation metrics.
Currently, small-cap equities trade at a 15% discount to fair value, making them the most attractively priced segment of the market. In contrast, growth stocks are trading at an 8% premium, while core stocks hover near equilibrium. This valuation gap is drawing attention from institutional investors seeking long-term upside in a slowing economic environment.
Historically, small-cap stocks tend to outperform during periods of monetary easing and economic recovery. With the Federal Reserve widely expected to cut interest rates by 25 basis points, and long-term yields trending lower, conditions are aligning for a sustained rally in this segment.
Earnings reports from select small-cap firms have further fueled optimism. Integrated Industries, a fast-moving consumer goods company, posted a 78% year-on-year increase in net sales and a 51.7% rise in profit after tax for the June quarter. Meanwhile, Colab Platforms, a diversified tech firm, has surged 550% year-to-date, hitting its upper circuit for 62 consecutive trading sessions.
This performance suggests a potential rotation away from mega-cap tech stocks toward smaller, more agile businesses. While risks remain—particularly around trade policy and macroeconomic volatility—the current environment favors companies with strong fundamentals and domestic exposure.
This rally may mark the beginning of a broader revaluation cycle, as investors reassess growth potential across market segments and prepare for a more accommodative monetary landscape.