Small-cap stocks can shine in a recession

Jonathan Boyar, director of Boyar Value Group and advisor to the MAPFRE AM US Forgotten Value Fund From a valuation standpoint, small-cap value shares are far and away the cheapest U.S. stocks. While large-cap growth shares (led by the Magnificent Seven group of tech stocks) are trading 36% above their 20-year average price/earnings multiple, JP Morgan reports that small-cap value is selling 14% below its 20-year average. The Russell 2000, a basket of smaller-cap companies, has been in a bear market since peaking in late 2021. It has since trailed the Russell 1000, which indexes larger-cap stocks, by about 20 full percentage points.

Many factors could help explain the short-term underperformance of small-cap shares, including rising interest rates, History suggests that leadership of the stock market could soon pass from large-caps to small-caps—especially if an economic slowdown lies ahead.

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