This Index Is Officially in a Bear Market -- and It Could Be a Once-in-a-Generation Opportunity for Investors

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Matt Frankel, The Motley Fool

Sat, Apr 5, 2025, 6:37 AM 4 min read

In fact, the Russell 2000, which is wide considered to beryllium the astir broad scale of small-cap stocks, has present officially fallen into carnivore marketplace territory. The time aft the tariff announcement, the scale fell to a level that is 22% beneath its caller high, and the futures markets bespeak that it could beryllium substantially little by the clip you're speechmaking this.

Not lone has the Russell 2000 dramatically underperformed the broader banal market, but small-cap stocks were already alternatively cheap, comparative to their large-cap counterparts, entering 2025. Here's wherever things basal with the small-cap benchmark close now, and wherefore investing successful the Russell 2000 close present could beryllium a large mode to acceptable your portfolio up for years of market-beating returns.

Small-cap stocks are trading astatine the lowest valuations comparative to the S&P 500 successful decades, and the spread continues to widen.

At the opening of 2024, Fundstrat expert Tom Lee correctly pointed retired that tiny caps were trading for their lowest price-to-book aggregate comparative to ample caps since 1999. And since that time, the spread has widened considerably. Last year, the Russell 2000 underperformed the S&P 500 by astir 14 percent points, and it has underperformed by different 6 percent points already this year.

The spread is simply a spot mind-boggling. The mean S&P 500 constituent trades for a price-to-earnings ratio of 26.8, and for a price-to-book aggregate of 4.8. On the different hand, the mean constituent of the Russell 2000 trades for 17.5 times net and for a P/B ratio of conscionable 1.9.

To beryllium fair, large-cap stocks person grown their net astatine a somewhat faster complaint successful caller years (mainly owed to the occurrence of megacap exertion stocks). But not by capable to warrant a price-to-book valuation that's astir 150% greater.

Lee besides pointed retired that the past clip the spread was truthful wide, tiny caps went connected to outperform ample caps for the adjacent 12 years, and by a full of 113 percent points supra the S&P 500.

Of course, there's nary warrant that the aforesaid happening volition hap this clip around. But determination are bully reasons to judge that tiny caps could beryllium acceptable up to outperform. For example, small-cap stocks thin to payment much from involvement complaint cuts, owed to typically higher dependence connected borrowed money, arsenic good arsenic accrued appetite for capitalist speculation arsenic rates connected risk-free investments fall.