The surge in U.S. Treasury yields has begun to hit some easily overlooked corners of the stock market, especially as the spotlight once again turns towards a handful of highly successful technology companies.

Investors' renewed enthusiasm for tech stocks has propelled the S&P 500 Index to overtake the Russell 2000 Index again this week in terms of year-to-date performance in 2026. Meanwhile, under the pressure of rising U.S. Treasury yields, small-cap stocks are heading towards their adjustment range.

This should have been a year in which steady economic growth drove the upward trend of the stock market. However, on Wednesday, the Russell 2000 Index closed at 2,793.20 points, a 9% decline from its historical high set less than two months ago, bringing this small-cap index close to entering an adjustment period. Typically, a market adjustment is indicated by a drop of at least 10% from recent highs, which means that if the Russell 2000 Index closes at 2,761.58 points or lower, it will officially enter an adjustment period.

It is worth noting that the performance of this small-cap stock index has lagged behind the S&P 500 index since the beginning of this year, and there has been a sharp reversal compared to just a few weeks ago. This reflects investors flocking back to a handful of technology stocks driven by the AI concept. Earlier this week, it was these stocks that propelled the large-cap index to new highs, while other stocks struggled. FactSet data shows that as of 2026, the Russell 2000 index has risen by 12.5%, while the S&P 500 index has risen by 14% during the same period.

The "primary and most important factor" behind the recent decline in small-cap stocks is the continuously rising long-term U.S. Treasury yields, said Keith Lerner, Chief Investment Officer of Truist Advisory Services. "Rising interest rates are having an impact – it's just that the tech sector has masked this effect."

Overall, over the past month, most sectors that are sensitive to interest rates have been under pressure. FactSet data shows that since the beginning of September, the financial and real estate sectors of the S&P 500 index have both fallen by more than 7%, while the materials and industrial sectors have declined by 5.4% and 4% respectively during the same period.

"In my opinion, the key point is that small-cap stocks are more sensitive to interest rates. Compared to large-cap stocks, small-cap companies carry more debt, including a larger proportion of floating-rate debt," Lerner stated on Wednesday.

Indeed, as concerns about inflation, rising oil prices, and the continuous expansion of the U.S. fiscal deficit drive up bond yields, this will put pressure on the valuations and refinancing of small-cap stocks. Those smaller companies, which often have not yet turned a profit, rely heavily on large amounts of floating-rate debt to fund their business growth. Once interest rates soar, the cost of borrowing will erode their already thin profit margins.

In contrast, large-cap stocks, including the "seven giants" in the technology sector, have been almost immune to changes in interest rates over the past few months, despite borrowing heavily to advance the construction of AI. Against the backdrop of fluctuating interest rates, investors have flocked back to these companies and other firms with impressive profit margins in search of safe havens.

In addition, small-cap stocks generally have a limited exposure to the technology sector. The shift of funds to companies with stronger balance sheets and higher quality is the reason behind the recent rise in the S&P 500 index. However, even small-cap stocks that focus on technology are facing difficulties: FactSet data shows that Invesco S & P SmallCap Information Technology have fallen by 10.4% from their historical highs set on June 30th.

Steve Sosnick, the chief strategist at Yingtou Securities ( Interactive Brokers ), believes that although the economy remains stable, the current environment is not particularly favorable for small-cap stocks. While he considers the economic situation to be "good," he is also concerned that current economic activity is to a large extent dominated by the expansion of AI data centers.

"A 2.2% GDP growth rate in the second quarter may not benefit all sectors," he said. "Therefore, economic growth is not balanced, and coupled with a significant rebound in interest rates, this creates a difficult environment for small-cap stocks."

The minutes from the Federal Reserve's September meeting, released on Wednesday, show that most Fed officials believe it may be appropriate to raise interest rates by another 25 basis points before the end of the year. The US central bank just raised its benchmark interest rate to a range of 3.75% to 4% last month.

U.S. stocks closed lower on Wednesday. FactSet data shows that the Russell 2000 index tumbled 1.3%, while both the S&P 500 index and the Nasdaq Composite Index fell 0.2%. The Dow Jones Industrial Average declined by 0.7%.

Responsible Editor: Yu Jian SF069