The stock market has been on a bull run, with the S&P 500 reaching new all-time highs in 2024. However, not all stocks have experienced the same level of growth during this period. Big tech companies have been leading the way, especially those using artificial intelligence (AI) to drive innovation and increase stock prices.
At Extreme Investor Network, we understand the importance of staying ahead of trends in the market. While big tech companies have been highly valued due to their expected earnings growth, there is an indicator suggesting a potential shift in market dominance. This presents a unique investment opportunity for investors to explore.
One key metric used to evaluate stocks is the price-to-earnings (P/E) ratio. By comparing the forward P/E ratios of the S&P 500 and the small-cap S&P 600 index, we can see a significant valuation gap. Currently, the S&P 500 has a forward P/E of 21.3, while the S&P 600 sits at just 13.9, the widest gap since the early 2000s.
Historically, small-cap stocks have outperformed large-cap stocks over the long run. When the valuation gap between the two segments is wide, as it is now, small caps have the potential to generate higher returns for investors. For example, during the early 2000s, the S&P 600 produced a total return of 66.7% compared to 2.8% for the S&P 500 over a five-year period.
As interest rates are expected to be lowered and recession fears subside, now could be an opportune time to consider investing in small-cap stocks. At Extreme Investor Network, we recommend researching individual companies for the best opportunities or using index funds like the SPDR Portfolio S&P 600 Small Cap ETF (SPSM) or the Avantis U.S. Small Cap Value ETF (AVUV) to gain exposure to small caps.
While large-cap stocks still have their place in a diversified portfolio, investors may want to consider shifting their weighting towards small caps in today’s market. By staying informed and taking advantage of unique investment opportunities, investors can position themselves for success in the ever-evolving financial landscape.