Equities: Comparing Russell 2000 Versus S&P 500®

Since the Russell 2000 began tracking the performance of small-cap stocks in 1979, the index has broadly matched, if not slightly exceeded, the performance of the venerable S&P 500® index of large cap stocks (Figure 1).

While the two indexes’ overall performance has been similar and their correlation generally high (0.8 on average; ranging from 0.6 to 0.96 on a one-year rolling basis), they have diverged significantly at times.  (Figure 2).

Figure 1: 38 Years of Small-Cap-Versus-Large-Cap Performance.

  1. 1979-1983: the Russell 2000 outperformed the S&P 500® by 80% during a period of extreme economic turbulence with double-digit inflation, double-digit interest rates and back-to-back recessions in January-June 1980 and August 1981-December 1982.  At the time, investors judged that smaller companies navigated the environment more nimbly than larger ones.
  2. 1983-1990: during the long economic expansion in the 1980s, large caps rebounded, leaving small caps in the dust.  During this period of increased economic certainty, the S&P 500® outperformed the Russell 2000 by 91%, more than recovering its 1979-83 period of underperformance.
  3. 1990-1994: during the 1990-91 recession and its immediate aftermath, small caps again outperformed the S&P 500® by nearly 50%.
  4. 1994-1999: during the strongest phase of the 1990s expansion, the S&P 500® large caps again outperformed the Russell 2000 small caps just as they had during the 1980s boom.  This time the S&P 500® outperformed the Russell 2000 by 93% over five years.
  5. 1999-2014: in a new era of turbulence (tech wreck, 9/11, Afghanistan and Iraq wars, subprime bubble, economic meltdown and quantitative easing, small caps swiftly outperformed large caps once again, with the Russell 2000 drubbing the S&P 500 by 114%.
  6. Since 2014: large cap stocks generally outperformed during the later stages of the 2010s expansion, much as they had during the later stages of expansion during the 1980s and 1990s and even as they did during the final stages of the 2003-2007 period of growth.  Much of the recent outperformance of large caps has to do with their larger weighting to technology stocks and the spectacular performance of a handful of the very largest tech firms. The Covid-19 pandemic hit small caps especially hard.  Few among them are online delivery services or other entities that have proven to be relatively insulated from the crisis.  Small caps stocks have shown a much stronger reaction to news regarding lockdowns or the possible lifting of lockdowns that have large caps. Since early 2014, the S&P 500 has outperformed Russell 2000 by 56% as of mid-April 2020. 

Figure 2: Small-Cap Outperformance and Underperformance Since 1979.

Despite the evolution in the ratio between small and large cap stocks over time over time, the daily correlation of the indices remains extremely high, especially during periods of stress (Figure 3).  The fact of a high correlation between small caps and large caps is probably a little frustrating to long-only investment managers as it limits diversification benefits.  By contrast, for long/short managers, the strong correlation opens up possibilities to profit from the strong trends in the relative performance of the two indexes – and significant risks, as well, if they are caught on the wrong side of the trade.

Figure 3: Highly-Positive and Reasonably Stable Historical Correlations.

Since 2000, realized volatility has been higher for small cap stocks than it has been for large cap stocks, although this was not the case prior to the year 2000 (Figure 4).

Figure 4: Smalls Caps Have Been Riskier than Large Caps Since 2000 (but not Pre-2000).

The key question for small cap stocks is, relative to large caps, will they more successfully adapt to rapid changes in economic conditions in 2020s?  During past periods of economic distress (1979-82, the early 1990s, the early 2000s and the global financial crisis and immediate aftermath), small caps outperformed.  This time, will they be able to overcome or adapt to the competitive advantages of the largest online delivery, software, social networking and technology equipment makers?  The answer to these questions may depend on the course of the pandemic and what the world looks like when the pandemic eventually subsides. 

Bottom line:

  • Although the Russell 2000 and S&P 500® usually exhibit a high correlation, they can have periods of significant outperformance/underperformance relative to one another.
  • Small caps have typically outperformed large caps during period of economic turbulence (1979-83, 1990-94 and 1999-2014).
  • Large caps often outperform in the later stages of bull markets and during the strong phases of economic expansion.
  • Since 2014, the S&P 500® has been rebounding versus Russell 2000.
  • Small cap stocks have been especially hard-hit during the pandemic.
  • Russell 2000 has a lower weighting to technology stocks than does the S&P 500.


All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author(s) and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.

About the Author

Erik Norland is Executive Director and Senior Economist of CME Group. He is responsible for generating economic analysis on global financial markets by identifying emerging trends, evaluating economic factors and forecasting their impact on CME Group and the company’s business strategy, and upon those who trade in its various markets. He is also one of CME Group’s spokespeople on global economic, financial and geopolitical conditions.

View more reports from Erik Norland, Executive Director and Senior Economist of CME Group.

Russell 2000

Stocks have been on a prolonged bull run, hitting consecutive all-time highs along the way. Are market conditions right to invest in the Russell 2000 index of small-cap stocks which tends to outperform the S&P 500® during times when economic expansion wanes?

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