The bull market celebrated its two-year birthday over the weekend. The S&P 500 is up 63% over that period and sitting at its best level ever. But not all stocks are enjoying the outsized gains…
Despite a few recent attempts to rally, small caps continue to lag their larger counterparts.
As you can see in the chart below, small caps – as measured by the iShares Core S&P Small-Cap ETF (IJR) – returned half of what the S&P 500 did over the last two years. The iShares Micro-Cap ETF (IWC) has underperformed by even more.
But the above picture is just a two-year snapshot. The long-term outlook for small caps remains bullish…
Take a look at the chart below, which shows small-cap stocks’ performance since the iShares Core Small-Cap ETF was launched in mid-2000. Smaller stocks have greatly outperformed the S&P 500 over that 20-plus year timeframe.
That makes now the right time to be overweight small caps. Here’s why…
We’re entering a period where innovations ranging from artificial intelligence (AI) to genomics and self-driving cars are becoming reality. Small companies are often on the cutting edge of innovation. And that means they’re positioned to become the leaders of the next great technological breakthroughs.
Interest rates are falling, and the Federal Reserve plans to continue its rate cutting cycle into next year. These lower rates are bullish for small companies that often rely on borrowing money during their early growth stages.
Small caps are undervalued both on a historical basis and versus their large-cap peers. The price-to-earnings (P/E) ratio of the S&P SmallCap 600 Index is 14.7 while the S&P 500’s is 22.8. But when you consider that small caps’ growth potential typically exceeds that of larger companies, it’s clear that their valuations should be higher.
Finally, small caps have underperformed in recent years. I’m confident there will be a reversion to the mean – and that they’ll lead the next bull market.
There are several ways to play this trend…
If you have a retirement account with only funds available, there should be some small-cap options to choose from. But your options are even greater if you’re looking to invest in individual stocks.
Small caps are the sole focus of my Early Opportunities Report investment newsletter. My team and I scour the market daily to uncover “hidden gems” in the small-cap space before Wall Street and the mainstream media have even heard their names.
By investing in these companies early, we stand to make massive gains as these companies grow from obscurity to household-name status.
This is an area of the market I’m passionate about. If you are, too – or if you simply want to learn more about our strategy of investing in small, innovative companies early – I encourage you to click here for more information.
Here’s to the future,
Matt McCallEditor, Market Insights
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