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Small-Cap Stock Dynamics in Mid-2025
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The small-cap stock market dances to its own dynamic and oftentimes tumultuous rhythm. Here's what you need to know in mid-2025 to make smarter small-cap investing decisions, courtesy of the SmallCap Informer newsletter. Quote:Small-caps continue to battle the market titans for their share of investor interest. Small company stocks continue to underperform as they have in much of the past decade—especially in 2023 and 2024. Both the Russell 2000 and the S&P SmallCap 600 have lagged behind their larger counterparts in the S&P 500 for most of the recent past. Much of the dimmer light shone on small-caps is due to mega-cap tech stars (the “Magnificent Seven”) hogging the spotlight and siphoning investor enthusiasm.... Read more.... Doug
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 1 user thanked gerlach for this useful post.
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The small-cap underperformance has been mostly a rate story plus the Mag-7 concentration you mentioned. IWM's earnings yield vs. the 10-year hit its widest spread in 15 years during 2024 and has compressed since. One thing I watch as a trigger is the Russell 2000 breadth: percent of constituents above their 200-day. When that crosses back above 60 percent with a falling VIX it has historically preceded 12-month outperformance vs. the S&P. We saw the crossover briefly in Q4 2024 and again early 2026. The other real issue is 40 percent of the Russell 2000 is unprofitable on a trailing basis. A quality-screen overlay (positive FCF, ROE > 10 percent) changes the whole risk/reward.
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Rank: Newbie
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On the small-cap dynamics question I've been pulling IWM, IWO, and the S&P SmallCap 600 charts in parallel on https://covenantalpha.com to see whether the underperformance is really a valuation gap or a composition issue. The breakdown by sector weight vs. the R1000 makes the financials/industrials overweight on the small-cap side pretty stark. It doesn't replace the IBD small-cap research but gives me a faster visual for where the dispersion is actually coming from.
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