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Small-cap stocks are gaining ground as expectations grow for interest rate cuts in the U.S.

The Russell 2000 index rose 4% on Aug. 22 after U.S. Federal Reserve Chair Jerome Powell signalled that the central bank is likely to favor lower interest rates in coming months.

The small-cap stock index has now gained 5% on the year and there appears to be growing optimism for a breakout after a decade of underperformance vis-à-vis large-cap stocks.

The Russell 2000 index is up 33% from its April low this year when U.S. President Donald Trump's tariffs sent global markets into a tailspin.

Now, %SmallCapStocks are expected to get a further boost as interest rates move lower.

While larger companies can tap the bond market or secure loans to fund their growth, small-cap companies are more reliant on direct bank lending and sensitive to interest rates.

Lower rates are especially beneficial to small-cap companies as they provide greater access to capital at lower costs.

Small-cap stocks are typically securities that have market capitalizations of $10 billion U.S. or less. They have underperformed large-cap stocks since the 2008-09 financial crisis.

Leading small-cap stocks that have risen significantly this year include names such as %AppliedDigital (NASDAQ: $APLD ) and %BrinkerInternational (NYSE: $EAT ).