Goldman Sachs’ David Kostin estimates that the recent rolling five-day relative return for U.S. small-caps was the best in at least 40 years.
In the past two weeks, the Russell 2000 has experienced its strongest performance since 2002. Yesterday, it rebounded from early losses to once again outperform the Nasdaq and S&P 500, advancing by a respectable 1.7 percent.
Kostin attributes the rally to decelerating inflation, anticipated Federal Reserve rate cuts, resilient economic growth, rising chances of a Trump presidency, and the narrowing earnings growth gap between large and small-cap stocks.
He predicts that the rotation into small-caps will persist unless the economic environment changes significantly or megacap tech stocks deliver another round of stellar results, prompting analysts to raise forecasts for the rest of the year.
William Blair and Robeco are even more optimistic. Robeco's Matthias Hanauer, Jan de Koning, and Pim van Vliet believe that the underperformance of small-caps over the past decade is more due to changes in relative valuation than deteriorating fundamentals.
With the valuation gap between small and large-cap stocks at its widest in over 20 years, they see this as a "multi-decade opportunity for investors." The last time value-weighted indices outperformed equal-weighted indices this dramatically was during the dot-com bubble, which ended in a substantial regime change.
Even now, small-caps trade at a discount of over 20 percent to large-caps—across almost any valuation metric—compared to their long-term historical premium of up to 30 percent, according to the Dutch asset manager.
