S&P 500 Shows Growth, But Small-Caps Could Outperform Soon

S&P 500's impressive 58% return led by top stocks raises questions. Investors should consider mid-cap and small-cap stocks for better returns ahead.

Date: 06-01-2025

AI Rating: 6

Performance Overview: The analysis mentions that the S&P 500 produced a stellar total return of 58% from 2023 to 2024, heavily driven by advancements in artificial intelligence among the largest companies.

The text suggests that while large-cap stocks, especially the Magnificent Seven, have seen robust financial results, there may be a risk of mean reversion as their stock prices have climbed out of alignment with their underlying fundamentals.

Earnings Growth: Future earnings growth projections for the S&P indices show that while the S&P 500 anticipates growth of 14.2% for 2025, small-cap stocks (S&P 600) are projected to grow their earnings at a higher rate of 20.9%. This discrepancy indicates that small-cap stocks may offer better investment opportunities moving forward. In 2026, the anticipated growth rates are 13.8% for the S&P 500, 16% for the S&P 400, and still 18.8% for small-cap stocks.

Large-Cap Valuation Concerns: Investors might also want to assess the current valuations of large-cap stocks, as the cyclically adjusted P/E (CAPE) ratio indicates high valuation levels compared to historical figures. With a CAPE of 37.5, the report signals an overpriced market overall, further supporting the argument that diversification into mid and small-cap stocks could be advantageous.

The text does not provide specific numbers or metrics related to EPS, Revenue Growth, Net Income, or Profit Margins, focusing more on the broader market dynamics and growth expectations.

In summary, while the current performance of the S&P 500 is strong, structural concerns about value and growth potential may lead investors to explore small-cap stocks for future gains.

Stocks: AAPL AVMC AVUV BRK.B