Look for small-cap U.S. stocks to continue beating the largest stocks.
That’s because small-cap relative strength trends tend to persist, and U.S. small-cap stocks have beaten the largest caps for over a year
Over the past 12 months (through July 10), the Russell 2000 index RUT, which represents small- and midcap stocks, produced a total return of 20.7%, versus 11.3% for the large-cap-dominated S&P 500 SPX. Most Read from MarketWatch The trend-following tendency of small-cap relative strength is consistent with my analysis of small- and large-cap returns over the past century. Relative strength over the trailing year is the strongest predictor of whether the smallest stocks will beat the largest in a given month.
Put simply, outperformance persists, and so does underperformance. No other factor that I studied, including trends in inflation, interest rates or the overall market, had any ability to forecast whether small-cap relative strength would continue. Quality counts If you bet on small-cap relative strength as a portfolio strategy, you should know that it’s important to pay close attention to each company’s balance sheet and income statement.