Small-Cap Stocks Drop as Treasury Yields Hit 20-Year Highs

Small-cap stocks, tracked by the Russell 2000 index, have declined more than 5% over the past month. This downturn coincides with 10- and 30-year Treasury yields reaching levels not seen since the early 2000s. The index has fallen approximately 16% relative to the Nasdaq-100, as investors shift capital toward technology and artificial intelligence-linked stocks for safety.

Jonathan Krinsky of BTIG reports that the relative strength index for the Russell 2000 to Nasdaq-100 ratio has fallen to 12.77. This marks only the fourth time since 1985 that the ratio has dropped below 14. While this suggests a potential contrarian buying opportunity, Krinsky warns that "oversold does not mean over."

Small companies remain particularly vulnerable to high interest rates because they rely heavily on borrowing for growth and debt refinancing. Despite the volatility, Barclays has identified Ultra Clean Holdings, Penguin Solutions, and PTC Therapeutics as small-cap stocks that could outperform if the sector recovers.