Daily Spotlight

Don't Overlook Small- and Mid-Caps

Despite bursts of volatility, small- and mid-cap stocks (SMID) have outperformed large-caps year to date. And looking ahead, SMID stocks may be in a better position to generate market-beating returns. For one thing, SMID companies tend to focus on domestic markets, so their businesses could be less disrupted by the trade and tariff debate, fallout from unrest in the Middle East, the Russian invasion of Ukraine, issues in China, or other geopolitical developments. As well, higher interest rates as the Federal Reserve tightens policy could signal a stronger domestic economy for companies of all sizes. In addition, the prices of SMID stocks generally are lower than the prices of large-caps, with the P/E ratio on the Russell 2000 SmallCap Index at 17, compared to a trailing P/E near 25 for the S&P 500. Finally, there are long stretches in the record books when SMID stocks have outperformed large-caps. Indeed, from 2003-2021, the Russell 2000 Index climbed 450%, compared to an advance of 330% for the S&P 500. That said, SMID stocks can be risky. The standard deviation for monthly returns was 5.7% for SMID stocks during 2003-2026, versus 4.2% for large-caps. SMID stocks fell further in negative years during our test period when they did fall, with an average 15% drop versus a 12% pullback for large-caps. Still, despite the risks, diversified investors look to have exposure to small-caps and mid-caps based on the long-term performance record. We estimate that 10% of the U.S. stock market's capitalization is comprised of SMID stocks....  the Federal Reserve tightens policy could signal a stronger domestic economy for companies of all sizes. In addition, the prices of SMID stocks generally are lower than the prices of large-caps, with the P/E ratio on the Russell 2000 SmallCap Index at 17, compared to a trailing P/E near 25 for the S&P 500. Finally, there are long stretches in the record books when SMID stocks have outperformed large-caps. Indeed, from 2003-2021, the Russell 2000 Index climbed 450%, compared to an advance of 330% for the S&P 500. That said, SMID stocks can be risky. The standard deviation for monthly returns was 5.7% for SMID stocks during 2003-2026, versus 4.2% for large-caps. SMID stocks fell further in negative years during our test period when they did fall, with an average 15% drop versus a 12% pullback for large-caps. Still, despite the risks, diversified investors look to have exposure to small-caps and mid-caps based on the long-term performance record. We estimate that 10% of the U.S. stock market's capitalization is comprised of SMID stocks.  more

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