Over the past two years, the Federal Reserve has been continuously raising interest rates, causing small-cap companies to suffer greatly. These companies have a higher proportion of floating-rate debt, leading to faster transmission of interest costs. As a result, interest expenses are increasingly eroding profits. The data is shocking: the proportion of interest expenses to profits for small-cap stocks has skyrocketed from around 20% to over 45%. In comparison, large-cap companies are doing much better, but small-cap stocks have already been drained by interest costs.

Now, the story is beginning to reverse. The market is talking about "interest rates peaking and starting to cut." When this expectation emerges, the interest expense ratio for small-cap stocks also begins to decline. Theoretically, the benefit of rate cuts is most significant for them: interest expenses directly decrease, profit elasticity increases, and valuation recovery becomes possible.

But don’t celebrate too early. The key premise is that the economy remains stable. If economic weakness causes EBIT to decline, the denominator shrinks, and even if interest expenses decrease, this ratio could still rebound. In other words, the opportunity for small-cap stocks indeed comes from rate cuts, but the risk is very real—it's all about whether profits can hold up.