It’s no secret that the stock market took a massive nose after President Donald Trump revealed his plans for a “reciprocal tariff”, but there are some areas in the market that took the news more than others.
Actually Russell 2000which is considered to be the most comprehensive stock index with small caps, it is now officially filed in the bears market. On the day after the rates were announced, the index fell to a level 22% below its recent high level, and the futures markets show that it can be significantly lower to the point where you read it.
Not only is the Russell 2000 drastically lower the wider stock market, but stocks with small capital are already quite cheap, compared to their colleagues with large caps, entering in 2025. Here’s where things are with small caps at the moment and why investing in Russell 2000 can now be a great way to determine your portfolio for years in the market.
Shares with small caps are traded with the lowest grades against S&P 500 In decades, the difference continues to expand.
At the beginning of 2024, Fundstrat analyzer Tom Lee correctly indicated that small restrictions were traded for their lowest price, which was repeated to the big restrictions of 1999, and since then the difference has expanded significantly. Last year, Russell 2000 than the S&P 500 with about 14 percentage points and it is a lower with 6 more percentage points, which is already this year.
The gap is a little stunning. The average component of the S&P 500 is traded for a price-pricing ratio of 26.8 and a price-book by a multiple of 4.8. On the other hand, the average component of the Russell 2000 trades 17.5 times a profit and for a P/B ratio of only 1.9.
To be fair, large-lid shares have increased their revenue at a slightly faster pace in recent years (mainly due to the success of Megacap technology stocks). But not enough to justify the price estimate to books, which is about 150% greater.
Lee also said that the last time the gap was so wide, the small caps continued to excel large caps for the next 12 years and with a total of 113 percentage points over the S&P 500.
Of course, there is no guarantee that this time the same will happen. But there are good reasons to believe that small hats can be created to excel. For example, small capital shares tend to benefit more than a reduction in interest rates because of the usually higher dependence on borrowed money, as well as on the increased appetite for investor speculation, as the rate of risk-free investment falls.