Small Caps Outperforming: Is this the Start of a Widespread Market Recovery?
Investors complained about the current US stock market rally isn't a broad recovery as it was driven by a handful of mega-cap and AI-related stocks. However, according to a report from the Wall Street Journal, small-cap stocks have actually outperformed large-cap stocks in terms of index returns over the past month. This raises the question: could this be the beginning of a more widespread market recovery that will convince more investors of the legitimacy of this bullish trend?
The Russell 2000 is an index comprised of the 2,000 smallest stocks in the Russell 3000 index. It has surpassed the returns of the S&P 500 during the past month. Specifically, the iShares Russell 2000 ETF (IWM) has gained 8.5% in the last month, whereas the S&P 500 ETF (SPY) returned 6.3%. The SPDR Portfolio S&P 400 Mid Cap ETF (SPMD), which tracks mid-cap stocks, slightly trails behind at 6.1%.
However, the Invesco S&P 500 Equal Weight ETF (RSP) has lagged behind, with a gain of only 4.4% over the past month. This suggests a divergence in performance, with both large-cap and small-cap stocks experiencing gains, while mid-cap stocks are not faring as well.
Interestingly, the Dow Jones, consisting of big-cap stocks, has also underperformed, with a modest gain of 3.4% in the past month, while the tech-heavy Nasdaq 100 achieved a substantial 12% gain. This indicates that the current market rally is not solely a matter of big versus small-cap stocks but is being driven by specific sectors, particularly the technology sector.
Examining the best-performing sectors in the S&P 500, we find that the top three sectors are Communication Services, Technology, and Consumer Discretionary. Communication Services includes companies like Meta and Netflix, while Consumer Discretionary encompasses stocks such as Tesla and Amazon. These are commonly referred to as "tech stocks."
To reinforce this point, the Invesco S&P SmallCap Information Technology ETF (PSCT), which focuses on small-cap tech stocks, delivered an impressive return of 18% in just one month.
