Small-Caps Lately vs. Large-Caps

Over the last week or so, we’ve seen small-caps do what they haven’t been doing very much of for a long time: outperforming their large-cap peers. Small-cap companies are those w/a market capitalization under $2b, while large-cap companies are those w/a market cap above $10b. Market capitalization is simply cost per share x total outstanding shares available.

We have seen large-cap control the board for quite a while, though there have certainly been shorter periods where favor slides over to small-caps. Though since early 2021, large-caps have continued to win the tug-of-war notably. We use SPX (S&P 500 index) as the large-cap proxy, and RUT (Russell 2000 index) as the small-cap proxy, and while RUT has outperformed SPX over the last 7-, 30- and 90-days, that outperformance wanes over that period, and is eradicated on the year-to-date comparison.

This shorter-term outperformance has yet to change the tides in favor of small-caps, though, over the longer time horizon. When pitted against each other in a relative strength sense (how to gauge the “tug-of-war” between the two different index types), the graph below shows that longer-term control in favor of large-caps (SPX). Note: RUT represented by Xs rising towards top of chart, and SPX by Os descending towards bottom of chart.

While SPX has been favored in that battle since 2021, it’s not always the case. Small-caps are certainly a place where money can be made, and even now there are some small-caps shining bright (The Oncology Institute (TOI), a women’s cancer care facility w/a market cap of $343m, is up over 1000% this year - yes, you read that right). But the chart above highlights it’s longer-term trend versus large-caps. You can see periods where small-caps dominated (1999-2005), periods where the battle was even, and how, since 2018 (save for a period in 2020-2021), large-caps have been where the momentum has been.

Looking forward, we might see future interest rate cuts affecting this relationship. Lower costs for borrowing (in order to grow or expand a business, for example) tend to benefit the small-caps companies, as large-cap companies tend to have larger cash reserves to navigate periods of high-cost borrowing. Further, future recovery of the economic environment, and economic expansion (to be decided when this happens) could also act as tailwinds for small-caps.

For now, though, monitor this relationship before making changes to move away from large-cap holdings. Short-term performance isn’t necessarily a strong-enough indicator for longer-term trend changes.

Did you enjoy this blog? Want to chat more about this topic and how it relates to your portfolio? Want to talk about how to build a portfolio that capitalizes on larger market trends like this? Email me at [email protected] - I’d love to chat!