Investors may be overlooking a significant portion of the stock market, potentially missing out on a decade of strong performance. While the S&P 500 has been reaching new all-time highs in 2024, not all stocks have been benefiting from the current bull market.
In recent years, big tech companies have been driving the market’s growth, especially with advancements in artificial intelligence technology. The market has high expectations for these companies, leading to increased stock prices. However, there are indications that the dominance of big tech may be shifting, presenting a new investment opportunity in a different group of stocks.
One key indicator to consider is the price-to-earnings (P/E) ratio, which shows how much investors are paying for each dollar of earnings. By comparing the forward P/E ratios of large-cap S&P 500 stocks to small-cap S&P 600 stocks, there is a significant valuation gap. Currently, the S&P 500 has a forward P/E of 21.3, while the S&P 600 has a ratio of just 13.9, the widest gap since the early 2000s.
While past performance is not indicative of future results, historical data suggests that small-cap stocks have the potential to outperform large caps in the coming years. During the early 2000s, small caps significantly outperformed large caps, providing investors with substantial returns.
Factors such as high-interest rates and recession fears have previously impacted small-cap stocks negatively. However, with the Federal Reserve expected to cut interest rates and improving economic conditions, small caps could see a resurgence in performance.
Investors looking to capitalize on the potential of small-cap stocks can consider investing in index funds like the SPDR Portfolio S&P 600 Small Cap ETF, which tracks the S&P 600 index. Another option is the iShares Russell 2000 ETF, which follows the Russell 2000 index and includes a broader range of growth stocks.
For a more selective approach, the Avantis U.S. Small Cap Value ETF offers a mix of profitability and valuation criteria to narrow down small-cap stock options. While large caps still hold value in a portfolio, incorporating small-cap ETFs can provide diversification and potentially higher returns.
In DailyBubble’s view, considering the current valuation gap between large-cap and small-cap stocks, investors may benefit from shifting towards small-cap investments for potential outperformance in the market.