Rising Treasury Yields Drive September Small-Cap Stock Decline

Small-cap stocks in the U.S. market experienced a significant decline in September, trailing the performance of the S&P 500 and Nasdaq-100. The Russell 2000 index saw its year-to-date gains drop from 20 percent at the start of the month to 14 percent, a trend driven by rising interest rates and falling bond prices.

Market data indicates a high negative correlation between small-cap performance and the 10-year Treasury note. Kevin Gordon of the Schwab Center for Financial Research noted that small caps have struggled more than large caps to adjust to the Federal Reserve's hawkish turn and increasing long-term rates.

Bearish sentiment is further reflected in options trading, where put volume for the iShares Russell 2000 ETF nearly doubled its 30-day average and significantly outpaced call volume. Despite this volatility, some analysts maintain that improving U.S. growth data and strong fundamentals continue to support forward earnings estimates for small-cap companies.