Announcer:
4 Your Money is brought to you by NelsonCorp Wealth Management.
Brandy Auterson-Hurst:
It’s now time for 4 Your Money. We’re joined by Nate Kreinbrink, financial planner at NelsonCorp Wealth Management. Welcome back, Nate.
Nate Kreinbrink:
Thanks again for having me.
Brandy Auterson-Hurst:
So most investors track the S&P 500, but there’s a whole other part of the stock market that doesn’t get nearly as much attention. What are you seeing there?
Nate Kreinbrink:
Well, what we’re referring to are small cap stocks. These are companies with smaller market values that tend to be more focused on the domestic US economy. I think we’ve got a chart here that gives us a better picture of what we’re talking about here.
So this chart is comparing small cap stocks, which is represented by the Russell 2000 against larger cap stocks in the S&P 500. Now, what immediately jumps out to me is that small cap stocks have been in a prolonged slumber for nearly 15 years. A big reason for that has been the rise of passive investing, where large amounts of money are automatically flowing into these cap-weighted index funds that heavily these larger companies.
Also playing a part is that some of these small cap companies tend to be more sensitive to higher interest rates. So back in 2022, when interest rates surged, it created another major headwind for these smaller companies. Now, the interesting part of all this is that this performance gap has also created a pretty meaningful valuation gap. So right now, investors are paying far higher valuations for large cap stocks than what they are for smaller cap companies.
Brandy Auterson-Hurst:
Okay. So what should investors take away from this?
Nate Kreinbrink:
Well, this chart is actually a reality of the world that we live in right now. Enthusiasm for AI and mega cap dominance have controlled the market narrative. A small group of large companies carry the bulk of market gains while these smaller companies seem to be lagging behind. Now, the big question going forward is, how long can this narrative last as market leadership tends to kind of broaden out over time?
Brandy Auterson-Hurst:
If you missed any of our discussion, we’ll make it available for you on ourquadcities.com.
Past performance is no guarantee of future results. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal.
Indices mentioned are unmanaged and cannot be invested into directly.
This video includes a paid appearance.