Stocks are at records, credit markets are showing strain, and small caps are in the middle of the debate. The picture is more mixed than the headlines suggest.
The S&P 500 and Nasdaq hit record highs on Tuesday. The Russell 2000 closed at 2,830, about 8% below its third-quarter high of 3,068 but still up roughly 14% this year, after finishing 2025 near 2,482. As of July, it had also outpaced the S&P 500 over six months (16.9% versus 8.9%) and one year (20.0% versus 9.9%), according to Benzinga.
The pressure is real. The 10-year Treasury yield closed at 5.27% on Tuesday, a level not seen since 2002. JPMorgan strategists say deeply distressed leveraged loans are at their highest since March 2020, and spreads on CCC-rated bonds have passed 1,000 basis points.
Those figures describe leveraged loans and junk bonds, though, not the companies in the Russell 2000.
Where small caps stand
Small caps do carry more rate risk. Interest expense takes up 31% of EBITDA at Russell 2000 companies, versus 6.7% for the S&P 500, and about 30% of their debt is floating-rate, according to July data from The Kobeissi Letter.
But that sensitivity works in both directions. When oil prices fell and rate expectations eased this spring, the Russell 2000 gained about 11.7% in the first 20 days of April, per 24/7 Wall St. The index has since recovered about 16% from its low during the Iran war selloff, breaking out of a multi-year base near 2,000 and closing the second quarter at 3,024.
Debt is concentrated, and many companies are cushioned
Not every small cap is carrying a heavy load. A 2024 Wellington analysis found that half of the Russell 2000’s debt sits with just 10% of its companies, while 33% held net cash, versus 13% for the S&P 500.
That study predates this year’s rate moves, but it points to a market where stress is concentrated rather than universal. JPMorgan’s latest data fits that pattern: technology accounts for 39% of distressed loans, with software borrowers facing more than $100 billion of maturing debt. Nearly 40% of the index’s companies are unprofitable, which also means a majority are not.
Signs of resilience
JPMorgan CEO Jamie Dimon said weeks ago, after the Federal Reserve’s September rate hike, that the labor market’s relative strength suggested higher borrowing costs had not yet turned into broader economic stress. On Tuesday, he warned that spreads could eventually widen as governments and AI spending compete for capital.
Markets are calm for now. The VIX, Wall Street’s fear gauge, closed near 15. JPMorgan projects a 2.25% default rate this year, though it expects defaults to rise next year.
What could help
Investors will be watching the 10-year yield, CCC spreads and the Fed’s next meeting under Chair Kevin Warsh. Falling yields would ease refinancing for the many small caps with debt coming due, and third-quarter earnings should show how companies are managing interest costs. Oil, trading near $90 a barrel, is another swing factor: its drop in April helped reset rate expectations.
Credit conditions are tightening, but small caps have already shown they can rebound when pressure eases. For companies with solid balance sheets, the data point to a hurdle rather than a roadblock.
