Rate cuts are the closest thing markets get to rocket fuel for the little guys. When central banks ease, two levers move at once: the discount rate investors use to value future earnings falls, and the real-world cost of debt drops for companies that actually have to borrow. That helps on both the spreadsheet and the shop floor. Multiples have a reason to expand, refinancing stops feeling like a punishment, and boards get braver about capex they’ve been shelving.

Australia just handed us a live case study with the RBA cutting rates yesterday. It wasn’t a wild surprise, but it was a clear signal that policy is shifting from restraint to relief as inflation cools and growth steadies. Across the Pacific, a friendlier US CPI print has finally put some light at the end of the tunnel for the Fed. The combination matters. A local cut plus the prospect of US easing doesn’t just improve sentiment; it changes the cost of capital that underwrites every model and every board paper. That’s the environment in which smaller, domestically oriented businesses—those that wear higher funding costs most acutely—tend to stop being the punchline and start catching a bid.

The mechanism isn’t mystical. Smaller companies usually run closer to the real economy and rely more on bank and bond markets that reprice quickly when policy turns. Cheaper money filters through to interest expense and to the confidence to invest, hire, and launch. On the market side, the part of the curve with more of its value tied up in tomorrow’s cash flows responds most to a lower discount rate, which is why small-cap multiples tend to stretch when cuts go from chatter to calendar. Large caps have already dined out on multiple expansion; plenty of small names haven’t. That gap creates room for an old-fashioned catch-up where earnings revisions and valuation re-rating reinforce each other.

Positioning and psychology do the rest. For months, money hid in the same crowded, liquid winners because certainty lived there. When the narrative broadens from “own the handful” to “own the market,” flows follow performance and performance follows flows. Breadth begets breadth. The moment investors fear underperforming by ignoring the smaller end, the feedback loop kicks in and what looked like a one-day wonder becomes a trend you can measure.

On the ASX, that means looking beyond the top-20 heavyweights and into the EX20—the overlooked patch where operating leverage and valuation catch-up can actually move a portfolio. I’m not interested in “cheap for a reason.” I’m looking for balance sheets that won’t flinch as rates fall, business models with real pricing power, and tangible catalysts: product rollouts, contract wins, cost programs, portfolio clean-ups. Think quality software and services with sticky customers, niche industrials with sensible capex cycles, healthcare operators with demand that doesn’t vanish when the headlines change. Resource juniors will always swing with commodity beta; the sturdier upside, in my view, sits with businesses that can compound when the cost of capital drifts lower.

Confirmation will come in a series rather than a single headline. A couple more cooler inflation prints matter more than one. Clearer central-bank guidance that cuts are imminent beats vague “data dependence.” Tighter credit spreads for smaller borrowers are the tell that funding relief is real, not just talk. And market breadth—more stocks making new highs over three to six months—will signal that leadership is actually widening, not merely rotating for a day.

There are ways this breaks, and it’s worth naming them. If the path to easier policy runs through a genuine growth scare, cyclicals and leveraged balance sheets can get hit before they heal. If policy missteps or geopolitics rekindle inflation, cuts get pushed out and the small-cap thesis loses air. That’s why the process matters as much as the idea: favour quality over fairy-tale cheapness, insist on identifiable catalysts, size positions with respect for volatility, and add on confirmation rather than bravado.

Could some of this already be priced? A little. But the mix right now—an RBA cut in hand, a US inflation pulse that’s finally cooperating, and positioning still skewed toward the big end—tilts the odds toward the smaller end of town. That’s why I think it’s time for small caps to pop, and why my focus is shifting toward quality names in the EX20 where a falling cost of capital can turn into real, compounding progress.