Title: Small-Cap Stocks Poised to Outperform as Valuation Gap Widens
The S&P 500 has been hitting record highs in 2024, driven by big tech stocks and their innovative use of artificial intelligence. However, a significant valuation gap between large-cap and small-cap stocks suggests a potential shift in market dynamics.
Currently, the forward P/E ratio of the S&P 500 is 21.3, while the S&P 600 sits at just 13.9, the widest gap since the early 2000s. Historically, when this gap has been this wide, small-cap stocks have outperformed their large-cap counterparts.
In the early 2000s, small caps saw significant gains while the S&P 500 struggled. From 2001 to 2005, the S&P 600 generated a total return of 66.7%, compared to just 2.8% for the S&P 500. Even during the Great Recession, small caps continued to outperform, with the S&P 600 producing a total return of 109.2% through 2010.
With expectations of interest rate cuts and diminishing recession fears, small-cap stocks could be poised for a comeback. Investors looking to capitalize on this trend can consider investing in small-cap index funds like the SPDR Portfolio S&P 600 Small Cap ETF or the iShares Russell 2000 ETF.
For a more active approach, the Avantis U.S. Small Cap Value ETF offers a diversified portfolio of small-cap stocks with low fees. While large caps still have a place in portfolios, tilting towards small caps could present a lucrative investment opportunity in today’s market.
Investors should carefully consider their options and consult with financial advisors before making any investment decisions.
