4 Small-Cap Stocks With Paths to Recovery After the Fed's September Rate Hike

Key Points

• The Russell 2000 has sold off since September 2026 after the Fed's rate hike raised borrowing costs for small-cap companies.
• First Interstate BancSystem, Enerpac Tool Group, and Century Communities each face distinct challenges but show potential paths toward recovery.
• Harmony Biosciences stands out as less rate-sensitive, with WAKIX sales growing 30% year over year and gaining regulatory momentum in Japan.

After a fairly steady upward trajectory during much of the spring and summer, the small-cap-focused Russell 2000 Index has experienced a sell-off over the past several months. One of the biggest catalysts has certainly been the Fed's interest rate hike in September 2026, which immediately increased pressure on smaller companies by raising borrowing costs. On top of this, uneven economic growth, the persistent impact of inflation, and built-in volatility among many small-cap names have made the space a challenging one heading into the end of the year.

Small-caps tend to have less diversified revenue streams than their larger peers and may be more economically sensitive as a result. Those firms that rely heavily on debt—particularly those with floating-rate debt or sizable near-term refinancing needs—can be in an especially tough spot. On the other hand, if borrowing costs decline, credit conditions improve, or a rotation away from larger companies occurs as investors search for more attractive valuations, the companies below may have the competitive advantages and paths to profitability to be at the forefront of the recovery.

First Interstate Has Been Able to Grow Margins and Keep Costs Down So Far

Regional banks are heavily reliant on deposit costs, demand for lending services, and credit quality. When funding costs are reduced and borrowers are able to take on more loans, companies like First Interstate BancSystem NASDAQ: FIBK, the holding company of a regional bank with locations throughout Western and Midwestern states, can shine.

With the company's Q3 2026 earnings report comes an opportunity to evaluate how sturdy it is in the face of external pressures. So far, First Interstate has been very successful at maintaining—and even expanding—its net interest margin; for Q3 2026, the net interest margin increased by eight basis points year over year (YOY) to 3.53%. On the other hand, though, net income was down, and earnings per share (EPS) came in below analyst predictions. These mixed results feed into analysts' cautious approach to FIBK shares.

Industrial Exposure That Comes With a Promising Acquisition

A maker of hydraulic tools and other industrial products, Enerpac Tool Group Corp. NYSE: EPAC has customers in infrastructure, maintenance, manufacturing, and other industries. This diversification may help the firm withstand a downturn in small caps; EPAC shares have fallen about 10% year to date (YTD) but have traded roughly flat over the last several months.

A potential catalyst in the coming months will be Enerpac's planned acquisition of SFE Group for $472 million, a deal that should expand the company's total addressable market by about $1 billion and open it to new opportunities in defense, data centers, semiconductors, and more. While Enerpac's cash-generation capacity has remained robust, there is a risk that this acquisition and subsequent ventures into new business areas could strain its finances. Analysts recommend caution even as they collectively predict roughly 41% upside for EPAC shares. Investors should watch EPAC closely when it reports its next earnings results, expected on Oct. 28.

A Higher-Risk, Higher-Reward Homebuilding Option

2026 has been a tough year for homebuilder stocks, and Century Communities Inc. NYSE: CCS focuses on a segment of the market that has been particularly pressured: single-family detached and attached homes catering to first-time buyers.

With mortgage rates reaching record highs and demand waning, the company continues to face numerous challenges.

This may be an opportunity for investors taking a longer view of the space to buy CCS stock while its value is depressed, as falling mortgage rates and a shift in the housing market could prompt a rebound. However, this is a risky play, as higher rates, rising building costs, and weak employment can combine to force builders to offer incentives to sell homes, reducing profit potential. Investors may find some confirmation on Oct. 28, when the firm reports its next earnings results.

Harmony's WAKIX Sees Promising Regulatory Updates

Biopharmaceutical companies are often highly volatile, even without being part of a larger sell-off movement. With this turbulence, however, comes the potential for massive gains when promising drugs take off. Harmony Biosciences Holdings Inc. NASDAQ: HRMY is therefore less directly exposed to interest rate risk compared to some of the companies above.

The company's principal product, WAKIX, has achieved promising updates from regulators in Japan, a potential indication that the excessive daytime sleepiness drug may be getting closer to global approval.

As it stands, sales of the drug in places where it is approved have been robust, growing by 30% year over year (YOY) for the latest quarter. This may be enough to make two-thirds of analysts bullish on HRMY shares and to assign a price target nearly 26% above the stock's current price.