Stocks soared on Friday after Federal Reserve Chair Jerome Powell signaled the central bank may be ready to resume cutting interest rates at its next policy meeting in September. 

Each of the major indexes finished the day sharply higher, led by a gain of nearly 4% for the Russell 2000 small-cap index, which closed at its highest level of 2025. Stocks that are particularly sensitive to rate cuts led the move higher.

“Our view is to expect a September rate cut and sectors that should benefit the most include home construction, small caps and banks,” said Larry Tentarelli, Chief Technical Strategist for Blue Chip Daily Trend Report. 

The DowJones Industrial Average, which hit its first record closing high since December, was led by stocks in the industrial and financial sectors. Construction equipment maker Caterpillar (CAT) and investment bank Goldman Sachs (GS) each rose about 4%, as both companies are expected to benefit from the stimulative effects of lower interest rates. Capital-intensive construction projects should pick up as borrowing costs decline, all else equal. Lower interest rates should also stimulate activity in capital markets, from which Goldman can expect to collect higher fees. 

The S&P 500 was similarly led by companies that will benefit from increased industrial and residential construction activity. Shares of construction equipment supplier Builders FirstSource (BLDR) jumped 8% and flooring supplier Mohawk Industries (MHK) added 7% on Friday.

Elevated interest rates have kept the U.S. housing market in a deep freeze for much of the last three years. Most new home buyers are priced out of the market by sky-high prices and the highest borrowing costs in more than a decade. Meanwhile, existing homeowners, many of whom locked in rock-bottom mortgage rates during the pandemic, have been reluctant to sell. That’s depressed homebuying and renovation activity. 

Shares of homebuilders soared in anticipation of a home-buying rebound. Pultegroup (PHM), D.R. Horton (DHI), and Lennar (LEN) each rose more than 5%. 

Small-cap stocks are also expected to benefit from lower rates. Smaller companies are more likely to hold floating-rate debt than larger competitors, making their margins more susceptible to compression when interest rates increase. For the same reason, they benefit more when rates decrease. 

According to Bank of America equities analyst Jill Carey Hall, history suggests that small-cap stocks outperform large caps most when rate cuts coincide with a recession. “Performance has been more mixed in non-recessionary cutting cycles,” Hall wrote in a note on Wednesday. 

However, small caps today are more sensitive to interest rates and face more refinancing risk than they have historically, according to Hall. That means that, assuming economic conditions don’t deteriorate much further, small-cap stocks could respond especially well to forthcoming rate cuts.