Market Expectations for 3 Fed Rate Cuts in 2025？
1. High Probability of a 25-basis-point Cut in September
Markets are nearly certain the Fed will lower rates by 25 basis points at the September 16–17 FOMC meeting, according to the CME’s FedWatch Tool. There's also a 10% chance being priced in for an outsized 50-basis-point cut.
2. More Cuts Expected Later in 2025
Barclays now forecasts three 25-bp cuts in 2025, up from a previous estimate of two. Other banks such as Bank of America and Macquarie also see cuts in September and December.
3. Year-End Total Cuts Projected Around 75–100 bps
Markets expect cumulative cuts totaling approximately 75 basis points by year-end, reducing the federal funds rate from the current ~4.25%–4.50% down to the mid-3% range.
Good sigh for small cap Stocks and ETFs?
Small caps have shown a strong resurgence recently, with the $iShares Russell 2000 ETF(IWM)$ ETF gaining 7.7% over the past 30 days, far outpacing the $Invesco QQQ(QQQ)$ ’s 2% rise. On a rolling three-month basis, IWM is up 13.5%, compared with 8.8% for QQQ and 8.9% for SPY, highlighting accelerating momentum.
Although QQQ still holds a 5.2% year-to-date lead over IWM, the performance gap has been narrowing as small caps have begun catching up to their megacap counterparts.
Here are ETFs to watch: $iShares Russell 2000 ETF(IWM)$ $Vanguard Russell 2000 ETF(VTWO)$ $Schwab US Small-Cap ETF(SCHA)$ $iShares Core S&P Small-Cap ETF(IJR)$ $Vanguard S&P Small-Cap 600 ETF(VIOO)$ $Direxion Daily Small Cap Bull 3x Shares(TNA)$
Since July 1st after $iShares Russell 2000 ETF(IWM)$ standing on 200 DMA, it has rose near to 10%. Read more on the on 💰Small-cap IWM Stands on the 200-DMA, Bullish in the H2 2025!
Data as of Sep 9th
What is IWM?
The iShares Russell 2000 ETF seeks to track the investment results of an index composed of small-capitalization U.S. equities.
Why do Rate cuts benefit small-cap companies?
Lower Financing Costs
Small-cap companies rely heavily on bank loans and debt financing to operate and expand. Rate cuts reduce borrowing costs, ease interest burdens, and improve cash flow and profitability. Compared with large caps that have stronger balance sheets or cheaper access to capital markets, small caps benefit more directly.
Valuation Recovery & Capital Rotation
Small caps often trade at lower valuations and suffer more in high-interest environments. When rates decline, investor risk appetite increases, prompting capital to rotate from large-cap/mega-cap tech into small caps, driving valuation recovery. Historically, small caps often outperform in the early stages of monetary easing cycles.
Greater Exposure to the Domestic Economy
Most small-cap businesses are concentrated in the U.S. domestic market, making them highly sensitive to U.S. economic activity. Rate cuts usually stimulate consumption and investment, which supports small-cap earnings growth.
In summary, Fed rate cuts help small caps because they lower financing costs, boost domestic demand, and attract capital rotation, making small caps more likely to outperform during easing cycles.
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