It feels like small-cap stocks can’t catch a break compared to their large-cap counterparts—and recent history seems to agree. Over the past four years, large caps have outperformed small caps every single year. In fact, 2024 was especially striking, with large caps outpacing small caps by a whopping 13.3%—the largest gap since 1998.
Looking back further, since 1978, there’s only been one instance where large caps beat small caps for five consecutive years. So, 2025 could be a historic year if this trend continues. But before we declare small caps down for the count, let’s zoom out for perspective:
Over the last 11 years, large caps outperformed small caps in 9 years (an 82% hit rate).
However, since 1978, small caps have actually outperformed large caps in more than half of all years, with a slight edge in performance overall.
So, while large caps have dominated recently, history tells a more balanced story. The question is: What could spark a small-cap turnaround?
We see two potential catalysts:
Sector Rotation: Small caps are more heavily weighted toward industrials and financials, compared to tech-heavy large caps. A rotation out of tech could give small caps a boost.
U.S. Dollar Strength: Small caps generate most of their revenue domestically, better shielding them from currency risk. If the dollar continues to strengthen, this could favor small caps over large-cap multinationals.
The narrative around small caps feels bleak, but history suggests they’re far from dead. Could 2025 be the year they reclaim the spotlight?
