Megacap tech stocks have dominated U.S. equity markets for several years, leaving small caps trailing significantly. The iShares Core S&P Small Cap ETF (IJR) has struggled, with the S&P 600 Small Cap Index experiencing six consecutive quarters of negative earnings growth, while the S&P 500 is poised for an 11th quarter of positive growth. However, forecasts suggest a turnaround for small caps, with expectations of 29% year-over-year earnings growth in Q4 2025, potentially outpacing the Nasdaq-100’s projected 28%.
This shift could narrow the valuation gap between small and large caps, as the iShares Core S&P Small Cap ETF currently trades at a P/E ratio of 18 compared to 28 for the S&P 500. As small-cap earnings growth begins to align with that of large caps, the current discount may not be sustainable, hinting at a potential for outperformance in the small-cap sector.
For those managing portfolios or strategizing investments, this evolving dynamic may present a compelling opportunity. I recommend exploring the full article for deeper insights into this trend and its implications for market positioning.
Source: fool.com