Small Caps Keep Falling Short

U.S. Small Caps Stocks Likely to Remain Behind Large Caps, Even as Economic Concerns Ease

Small cap stocks in the U.S. have spent much of the past decade trailing their large-cap peers—and that underperformance looks set to continue, even if concerns about the U.S. economy begin to fade.

While there have been brief periods of outperformance—such as last summer’s unexpected “great rotation”—these rallies have not been sustained. According to John Higgins, chief markets economist at Capital Economics, large-cap stocks are still positioned to outperform over the near term.

“Small-cap equities might enjoy some relief if economic fears diminish, which we expect despite possible disruptions from trade tensions,” Higgins said in a note. “Still, that alone is unlikely to spark a lasting shift in their relative performance.”

Supporters of small caps often cite their attractive valuations, but Higgins cautioned that valuation metrics are not reliable short-term signals. Right now, investor interest is heavily tilted toward high-growth themes like artificial intelligence, where leadership is concentrated in megacap names such as Nvidia (NVDA).

Higgins also challenged the idea that big tech gains are distorting performance comparisons. Even on an equal-weighted basis, small caps have consistently underperformed.

This weakness, however, appears to be largely confined to the U.S. In contrast, European small-cap stocks have held up better relative to their large-cap peers in 2025.

Despite bouncing back somewhat from the tariff-driven selloff in April, U.S. small-cap benchmarks like the Russell 2000 and S&P 600 remain down nearly 6% and 8% for the year, respectively. Meanwhile, the S&P 500 has posted a gain of more than 1.5%, according to FactSet.

Decades of academic research, including work by Nobel laureates Eugene Fama and Kenneth French, have suggested that small-cap stocks can outperform over the long run due to their higher risk profile. But in the current market, large caps continue to dominate—and that trend may not change anytime soon.