Small and midsize US stocks are struggling under the strain of high interest rates, as the Federal Reserve’s pledge to hold borrowing costs higher for longer threatens the weaker balance sheets of smaller companies.

The Russell 2000 small-cap index has fallen 11 per cent since its peak in July, while the S&P 500 is down 7 per cent over the same period. The small-cap index has fallen 7 per cent in September alone, leaving it more than 27 percentage points below its all-time high in 2021, compared with 11 percentage points for the S&P.

The underperformance highlights how smaller stocks are acutely feeling the effects of the Fed’s rate increases, at a time when some market watchers are questioning whether the transmission of interest rates to the economy has been blunted.