Market Extra: Small-cap stocks outperform so far in 2023 as U.S. equities book second week of gains this year

by | Jan 13, 2023 | Stock Market

Small-cap stocks are outperforming large-cap U.S. equities this year, in an upbeat start to 2023 after suffering steep losses last year. The Russell 2000 index, which tracks small-cap stocks in the U.S., was up 7.1% this year through Friday, according to FactSet data. That beats the 4.2% gain for the S&P 500, a gauge of large-cap stocks in the U.S., over the same period. 

“Typically you get these long cycles where small or large leads, and we’re just coming out of an 11-year period  where large beats small by a meaningful amount,” said Rayna Lesser Hannaway, a portfolio manager at Polen Capital who focuses on small-cap stocks, in a phone interview.  “Small-cap just looks really attractive on a relative valuation basis,” she said. “Small-cap typically tends to lead in the second half of interest-rate tightening cycles.” The Russell 2000
RUT,
+0.58%
has also outperformed the blue-chip index Dow Jones Industrial Average and technology-laden Nasdaq Composite this year through Friday. 

Small and mid-cap stocks “anticipated the bear market of 2022 back in 2021 as their valuation multiples plunged well ahead of the drop in the forward P/E of the S&P 500,” according to a Yardeni Research note Friday.  Forward price-to-earnings ratios, or P/E, for small and mid-cap stocks “seem to have bottomed during the bear market and may now be pointing higher,” Yardeni said in the note. “They are certainly cheap” relative to large-cap stocks.  A chart in his note highlights the valuation of the S&P Small Cap 600 index
SML,
+0.56%
relative to the S&P 500.

YARDENI RESEARCH NOTE DATED JAN. 13, 2023

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