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 more 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.

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

  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%.

Since early 2014 as the U.S. economic expansion matured, the S&P 500® began outperforming the Russell 2000 once again, gaining about 10%.  During this time, the correlation between the two indexes has fallen back towards its long-term average of 0.8 (Figure 3) and the Russell 2000 remained more volatile than the S&P 500®, as it has for most of the time since the turn of the century.

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

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.

All of this begs the question:  will the S&P 500® continue its post-2014 outperformance or will the Russell 2000 outperform again? The fact that the United States is in the mature phase of an economic expansion argues for a continued large-cap outperformance if equity investors respond to economic expansions as they did during the 1980s and 1990s.  What gives us a little bit of pause in that assessment is that small caps outperformed during the 2003-2007 economic expansion, which was admittedly relatively short compared to previous expansions.

Valuation measures such as price-earnings ratio (viewed here as its inverse, the earnings yield), price-to-sales ratio, price-to-book ratio and dividend yields don’t offer a coherent answer. That said, the first of these measures, earnings-yield, strongly suggests that large cap stocks are not overpriced versus small caps as they were around 1999 and 2000 when a 15-year period of small cap outperformance began (Figure 5).

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

Figure 5: S&P 500® Earnings-Yields are Usually Higher than Russell 2000 Except During the Late 1990s.

If anything, the earnings yield gap between the two indexes is exceptionally wide and might favor continued outperformance of the S&P 500® over the Russell 2000 as we move into what might be the late stages of an economic expansion.

Other measures, like the price-sales ratio, suggest the opposite: that large-cap stocks might be overvalued relative to small caps (Figure 6).

Figure 6: S&P 500 Price-Sales is Getting to Extreme Levels Versus Russell 2000.

Price-sales ratio has the advantage of being hard to fudge: companies can window dress earnings numbers much more easily than they can revenue statistics.  Price-sales ratio, however, has the disadvantage that it does not account for profit margins earned on those revenues. By this measure, the cap between the S&P 500®’s valuation relative to that of the Russell 2000 is nearly as wide as it was in 1999 when a long period of large-cap underperformance began.

Price-to-book and dividend-yields aren’t sending strong signals one way or the other.  S&P 500® price-book ratios are heading higher versus Russell 2000 but are nowhere close to the extreme levels in 2000 (Figure 7).  The meaning of aggregate book values, however, is questionable and companies can monkey with book-value accounting in all sorts of ways, including how they manage goodwill from acquisitions and account for the value of assets.

One valuation measure that companies really can’t monkey with is dividends.  Either they pay them or they don’t.  Some sectors may have tendencies to pay higher dividends than others, and certainly large caps tend to pay more than small caps but the gap between the S&P 500® dividend yield and that of the Russell 2000 shows nothing alarming for the moment (Figure 8).

Figure 7: Price Book Shows Nothing Alarming in Relative Valuations.

Figure 8: Nothing Unusual in the Dividend Yield Gap Between Russell 2000 and S&P 500®

Bottom line:

  • Although the Russell 2000 and S&P 500® usually exhibit a high correlation, they can have periods of massive 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.
  • Earnings-yields suggest that the rebound might last a while longer.
  • Price-sales ratio, by contrast, suggest that large cap valuations might be overextended.


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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