US small-caps roll on

The US equity market had a strong performance in 2024, with small-cap stocks, as represented by the Russell 2000 Index, achieving an 11.5% annual gain despite a volatile end to the year. However, small-caps continued to underperform relative to large-caps, marking the eighth consecutive year of such underperformance. The Russell 2000 has only outperformed the Russell 1000 in four of the last 20 years, highlighting a long-term trend of large-cap dominance.

A notable divergence occurred between US equities and global markets in the fourth quarter, with international small and large-cap indexes both experiencing declines. This was attributed to geopolitical unrest and economic challenges abroad, underscoring the resilience of US markets and the economy in the post-Covid era.

Within the US small-cap sector, growth stocks outpaced value stocks, reversing historical patterns of value resilience during downturns. The Russell 2000 Value Index lagged behind its growth counterpart over multiple time horizons, although it managed to outperform during certain volatile periods.

Sector-wise, information technology, industrials, and financials drove gains in the small-cap space, while energy was the primary detractor for the year. Specific industries such as software, semiconductors, and banks made significant positive contributions, whereas biotechnology and energy equipment and services faced challenges.

Looking ahead, the stage is set for potential small-cap leadership, influenced by the relative valuation attractiveness of small-caps compared to large-caps. The Russell 2000's valuation is near a 25-year low relative to the Russell 1000, suggesting possible opportunities for investors. Historical data indicates that periods of heightened volatility often precede strong small-cap returns, supporting a cautiously optimistic outlook for 2025. Financial experts are advised to view volatility not as a threat but as an opportunity for strategic long-term investment gains.