The Russell 2000 index has zoomed 13.4% so far in 2021, outperforming the benchmark S&P 500 which has managed to gain merely 3.2% during the same period.
Largecap stocks soared amid the pandemic while the smaller companies faced business hurdles, forcing stock prices to fall.
The Russell 2000 index has zoomed 13.4% so far in 2021, outperforming the benchmark S&P 500 which has managed to gain merely 3.2% during the same period. This outperformance hints at investors turning focus away from large-cap companies towards mid-cap and small-cap stocks as the US economy picks up after the pandemic-induced slump. Russell 2000 comprises 2,000 small-cap stocks, while the S&P 500 is made up of the largest 500 companies on Wall Street.
Small-cap stocks on fire: Top Russell 2000 gainers YTD 2021
Why smallcap, midcaps stocks are outperforming largecaps
Largecap stocks soared amid the pandemic while the smaller companies faced business hurdles, forcing stock prices to fall. “Largecap stocks benefited the most from the way that Covid-19 has been managed in the economy. They were better positioned to leverage technology and many big companies got special ‘essential services’ privileges that weren’t available to small and mid-cap companies,” said Richard Smith, CEO of The Foundation for the Study of Cycles, a research firm. He added that at this juncture a big rotation is taking place from growth to value.
Even valuations have run-up for larger companies, forcing investors to flee. “The market is always at the mercy of earning and while I expect earning to pick up across the board, what we saw last year in large tech and the stay at home basket will not be repeated. However, smaller baskets will continue to flourish on the reopening narrative,” said Stephen Innes, Chief Global Market Strategist at Axi. Innes further said that the small and midcap earnings will blossom during the catch-up phase of the recovery. “And given stretched valuation and the susceptibility of large-cap stock to higher yields, small and mid-cap look like a better bet from a valuation perspective.”
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