US small-caps roll on

Another positive quarter for most US equities

Although slowed by a volatile and bearish finish, small-cap stocks, as measured by the Russell 2000 Index, finished 2024 with a second consecutive positive quarter, gaining 0.3% in 4Q24. Unlike what happened in 3Q24, however, the small-cap index did not keep pace with its large-cap counterpart: the Russell 1000 Index was up 2.7% in 4Q24. Somewhat curiously, US equity returns had something like a bowl-shaped pattern in 2024’s final quarter. The Russell Microcap Index advanced 5.9% while the mega-cap Russell Top 50 Index rose 5.5%. Small-caps also hit a new peak on 11/25/24—more than three years after the previous peak on 11/8/21, which makes it the third longest span before a new peak was reached in the index’s more-than-45-year history.

As was the case in 3Q24, positive performance in the year’s final quarter masked a certain amount of volatility as most stocks, regardless of market cap, staggered toward 2024’s finish line, making December an uneven month for the major domestic indexes that was substantially worse for the small- and micro-cap indexes.

December’s underwhelming results notwithstanding, the upshot was a terrific year for small-cap performance on an absolute basis, with the Russell 2000 advancing 11.5%. Still, 2024 also marked an eighth straight year of underperformance relative to large-cap stocks. In fact, the Russell 2000 has beaten the Russell 1000 in only four of the last 20 calendar years, with an average outperformance spread 6.1%. It last did so in 2016, making the period ended 12/31/24 the longest underperformance stretch measured by calendar years since each index’s inception on 12/31/78. And while we are very aware of how long we have been looking forward to a sustained period of small-cap leadership, we do see promising signs for small-cap stocks on the horizon.

A different world

The fourth quarter marked a pronounced divergence between US equities and their global cohorts. The MSCI ACWI ex-USA Small Cap and MSCI ACWI ex-USA Large-Cap Indexes were both down in 4Q24, losing -7.7% and -7.6%, respectively. With political unrest affecting Germany, France, and Canada, as well as China’s ongoing economic slump, this fourth-quarter downturn was not particularly surprising. To be sure, these results for the non-US indexes also show just how resilient both the US economy and markets have been in the post-Covid environment.

For the full year, both indexes were in the black, with the advantage accruing to large-cap. The MSCI ACWI ex-USA Small Cap gained 3.4% for 2024 while its large-cap counterpart was up 6.0%.

Inside US small-caps

As has often been the case historically when small-cap lags large-cap, the Russell 2000 Value Index trailed the Russell 2000 Growth Index in 4Q24, down -1.1% versus a 1.7% increase. December was generally harder on value stocks than on growth—reversing the usual historical performance pattern wherein small-cap value generally loses less in downturns, even short-term spans.

In terms of leadership, recent results remained mostly in small-cap growth’s favor, with the Russell 2000 Value trailing for the 1-, 5-, and 10-year periods ended 12/31/24. The Russell 2000 Value beat its growth sibling for the 3-year period ended 12/31/24 while also winning from the previous small-cap peak on 11/8/21 through the end of 2024, up 1.7% versus a loss of -7.1% for the Russell 2000 Growth, a result more in line with the small-cap value index’s long-term pattern of losing less—or even gaining, as in this instance—during downturns or more highly volatile markets.

The US small-cap sector story

Five of the 11 sectors in the Russell 2000 were in the black for 4Q24, with information technology, industrials, and financials making the biggest positive contributions while health care, real estate, and energy detracted most.

At the industry level, two groups in information technology—software and semiconductors and semiconductor equipment—were among the three top contributing industries in 4Q24 while falling rates helped banks to make the second-biggest contribution in the quarter. Contributions in Industrials were spread a bit more widely, with aerospace and defense making the biggest positive impact. Biotechnology detracted most, while household durables, which is in consumer discretionary, energy equipment and services, and metals and mining from the materials sector, also had meaningful negative effects.

For the full year, 10 of 11 sectors contributed to performance, led by information technology, industrials, and financials. Energy was the lone detractor, and the smallest contributions came from utilities and materials. At the industry level, banks contributed most in 2024, followed by two groups in information technology: technology hardware, storage and peripherals and software. Construction and engineering, from industrials, also made a notable contribution. The industries that detracted most in 2024 were electrical equipment—which is in Industrials—health care technology, automobile components from consumer discretionary, and life sciences tools and services in health care.