Our Insights

About personal finance, investments and markets.
April 22, 2014

US large caps likely to outperform US small caps

Over the last few years, US small cap stocks have beaten large caps by a wide margin. Since early 2000, the US small cap index Russell 2000 has outperformed the S&P 500 by more than 80%. Going forward, we expect this trend to reverse.

Russell 2000 vs sp5000 since 2000

Why do we expect a better performance of US large caps in the future? It all comes down to valuation. After the strong outperformance of US small caps, they now trade at a record premium relative to US large caps.

US small caps vs SP500 are overvalued

Fundamentals also favour large caps at the moment. In the 4th quarter of 2013, US large caps exhibited a much lower percentage of negative earnings surprises than small caps. Profit warnings and high valuation usually create signficant headwinds for US small caps.

Large caps less negative earnings surprises

To investors who still want to maintain exposure to US equities, we recommend increasing the weighting of large caps at the expense of small caps. We do not often get the opportunity to lower risk and increase expected returns at the same time.

For further questions, please contact us at info@ipanema-capital.com

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