Since the beginning of this year, small-cap stocks in the U.S. stock market have consistently outperformed large-cap stocks, demonstrating significant relative strength. As of recently, the Russell 2000 Index, which focuses on small-cap stocks, has repeatedly set new closing highs this year and has outperformed the S&P 500 Index for 14 consecutive trading days, marking its longest winning streak since May 1996 during the early stages of the internet bubble. This performance coincides with a cooling of market enthusiasm for the artificial intelligence theme. As traders turn to other sectors in search of growth opportunities amid concerns about corporate cost inflation and profitability, small-cap stocks have benefited.
Regarding the impressive performance of small-cap stocks, institutional views are divided. In a recent report, Goldman Sachs predicted that U.S. economic growth will accelerate and exceed market expectations, while inflation will remain lower than expected, allowing the Federal Reserve to continue easing monetary policy. Goldman Sachs analyst Matthew Kaplan believes that the market has not fully priced in the potential strength of the U.S. economy next year and that small-cap stocks typically perform better during cyclical rebounds. However, some macro strategists point out that although there are signs of economic improvement, the foundation for growth remains fragile. Small-cap stocks need to prove that their rapid gains are supported by earnings to sustain their outperformance over the S&P 500 Index, which is driven by the AI theme. BTIG analyst Jonathan Krinsky has observed a noticeable shift in market leadership and believes this new trend is still in its early stages.
Over the past year, subtle changes have occurred in the market landscape. The “Magnificent Seven” tech giants (Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla), which previously led the market, have shown divergent stock performances. With the exception of Alphabet and Nvidia, the other giants have underperformed the S&P 500 Index over the past twelve months. Investors’ concerns about overvaluation in the market are partly reflected in the price corrections of these tech giants. Nevertheless, the “Magnificent Seven” companies themselves are robust and exhibit strong development momentum, possessing substantial financial strength to adapt to market changes.
In response to potential shifts in market styles, investors can position themselves through exchange-traded funds (ETFs) without being limited to individual stock selection. For investing in the “Magnificent Seven,” tools such as the Roundhill “Magnificent Seven” ETF (MAGS) can be utilized, which has an expense ratio of 0.29% and delivered a return of approximately 15% over the past year. Investing in small-cap stocks, on the other hand, entails higher risks in exchange for potential high growth. For investors interested in small-cap stocks but wishing to manage risks, ETFs like the iShares Russell 2000 ETF (IWM) offer diversified exposure. This fund holds nearly 2,000 stocks, with its largest holding accounting for only about 1% of the portfolio, effectively mitigating single-stock risk. Its expense ratio is 0.19%. Over the past twelve months, this ETF has gained 17%. Historical data shows that during the market downturn in 2022, the iShares Russell 2000 ETF experienced a slightly larger decline than the S&P 500 Index, but the performance of individual stocks within the “Magnificent Seven” was generally worse.
