US small-cap’s candidacy for market leadership

The first half of 2024 experienced notable volatility in stock markets, marked by a brief surge in small-cap performance that could not be sustained as large- and mega-cap stocks regained leadership. The Russell 2000 increased 1.7% year-to-date as of June 30, 2024, while the Russell 1000 gained 14.2%.

Despite small-caps’ strong performance in late 2023 and early 2024, longer-term trends show small-cap indexes struggling with consistent underperformance over the last decade. Historically, small-cap outperformance cycles have averaged over a decade, with the current cycle beginning in 2014.

The market landscape has been largely influenced by unprecedented factors such as the zero-interest-rate policy, the COVID-19 pandemic aftermath, and rapid interest rate hikes. However, July’s market shift, dubbed “The Great Rotation,” saw the Russell 2000 and Russell Microcap index rise significantly, possibly due to expectations of impending rate cuts.

Despite volatility, small-cap earnings growth forecasts are stronger than those for large-cap stocks, supported by favorable valuations. As market cycles are finite, maintaining a long-term investment view is essential, especially in an environment with potential for economic stabilization and growth.

The current period presents attractive opportunities for small-cap investments, likely benefiting from broader economic trends and easing inflation pressures moving forward.