Large Caps Are Lapping Small Caps: What it Could Mean

It could be said that stocks have performed well so far in 2024. The large cap S&P 500 Index (SPX) sports an over 6% year-to-date lead, which would be the 10th best start to the year through February out of the past 45 years (since 1980). The small cap Russell 2000 Index (RUT), however, presents a less favorable picture, up a paltry 0.1% which, ranks 29th out of the past 45 years.

In this analysis, I will unpack historical instances of the SPX outpacing the RUT early in the year to see if there are potential implications. Is this discrepancy indicative of future market direction? Does it raise the possibility of small caps catching up, and ultimately outperforming the SPX going forward? Let’s explore below.

Large Caps Outperforming Small Caps

First, I am looking at SPX performance when it outperforms its small cap counterpart. The relative strength of the RUT compared to the SPX is 0.94, which is the third lowest reading from the last 45 years (1999 and 1997 were the two years with a lower reading). There have been 11 years in which the reading was 0.98 or less. The table below shows the SPX performance in these 11 years, compared to the other years since 1980, which is the second table below.

Large caps outperforming small caps through February has typically led to underperforming March returns (0.61% average compared to 1.06% return in other years). But the longer-term returns have been stellar. Over the next six months in these situations, the SPX averaged a 10.5% return, with 91% of the returns positive. In other years, the SPX averaged a return of 3.4% over the next six months, with 67% positive. The rest show the SPX gaining about 18% on average when large caps have beaten small caps, compared to a 6.2% return otherwise.

Next, I have the same data for the RUT, indicating it's the same with the small cap stocks. When large caps have been outperforming through February, the RUT sees a poor March return, but excellent returns for the remainder of the year. The longer term returns for the RUT are nearly identical to the SPX returns. If you use this information as a guide, you will want to be holding stocks, regardless of whether they are large caps or small caps.

Most Similar Years

In the analysis above, we see how the SPX and RUT perform after the large caps outperform the small caps through the first two months of the year. Those 11 returns above, where the RUT had a low relative strength, don’t return years that are much like this year, however.

For example, it includes 2009, in which both indexes fell more than 18% in the first two months, and 2020 in which they both fell over 8.5%. Below, I separate the returns which are closest to the returns of this year’s SPX and RUT. From those years are below, 1997 stands out as the comparable to this year when it comes to the SPX and RUT year-to-date return through February. 

In 1997, the SPX was up 6.8% through February, and the RUT was down 0.7%. That March was rough, followed by an impressive April through December. Hopefully there is something to this pattern, because the four years which mostly resemble this year -- as far as the SPX and RUT return through February goes -- have brought on double-digit returns for the rest of the year each time.