Can Small-Cap Stocks Outshine S&P 500?

S&P 500 stocks have been outperforming their smaller peers in the Russell 2000 the last four years.

Transcript

00:00 Over the last 3 and 1/2 years, the S&P 500 has vastly outperformed the Russell 2000 to the tune of about 70%.

00:09 But can this outperformance of large cap stocks last in our small cap stocks a bargain?

00:20 Well, the truth is, over a very long period of time, both large cap stocks and small cap stocks tend to generate about the same performance, but they tend to do it at different times.

00:32 The large cap stocks of the S&P 500 tend to outperform during the later stages of economic recoveries, like during the late 1980s, the late 1990s, and after the year 2013, up until the pandemic of 2020.

00:48 By contrast, small cap stocks tend to do better at the beginnings of economic expansions, and also during recessions.

00:55 So if the economy experiences a downturn, the Russell 2000 could be a massive outperformer.

01:01 But here's one other reason to think that might be the case.

01:04 Look at the relative differences in their valuation ratios.

01:08 The S&P 500 trades at three times sales.

01:12 The Russell 2000, only one time sales.

01:15 When it comes to book value, The S&P 500 is trading at five times book, compared to only two times to the Russell 2000.

01:22 So small cap stocks are looking like a bargain.

01:25 The question is, will they begin to outperform?

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Transcript