Small-cap stocks look undervalued as the U.S. market continues to hit record highs fueled by gains in mega-cap technology companies such as Nvidia (NVDA) and Microsoft (MSFT).
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Large-cap stocks continue to have momentum, driven by demand for companies with exposure to artificial intelligence (AI). Currently, the technology-laden Nasdaq Composite and the benchmark S&P 500 are at all-time highs, with each index up 9% on the year.
By contrast, the small-cap-focused Russell 2000 index is up only 1% in 2025, continuing more than a decade of underperformance. The market value of the five biggest companies in the S&P 500 is now nearly five times the combined market value of the Russell 2000 index, according to an analysis by Jefferies Financial Group (JEF).
However, Jefferies sees the rally in small-cap stocks accelerating in coming months, fueled in part by gains in shares of companies such as Sprouts Farmers Market (SFM), Aritzia (ATZ), and Planet Labs (PL).
Recovery?
Nvidia, with a market value of $4.36 trillion, is 65% more valuable than all the stocks in the Russell 2000 combined, notes Jefferies in a report to clients. The 6.6% annualized total return on small-cap stocks over the past 10 years trails large-cap performance by 7.3 percentage points, the widest gap since 1935.
The outperformance has led to a widening gap between large-cap stock valuations relative to small caps. The divergence is reflected in the price-to-book ratios (P/B) of the Russell 1000 Index, which represents large-cap stocks, that currently trades at a P/B of 5.35. In contrast, the Russell 2000 small-cap index sits at a much lower 2.03 P/B.
Hunting for Value
This means investors are paying more than twice as much for each dollar of book value in large-cap stocks compared to small caps. Given the market peak and growing divide, Jefferies expects investors on the hunt for value to increasingly look to small-cap stocks, and for small caps to catch up in coming months.
Small-cap stocks have staged an impressive recovery off their April lows this year, rising nearly 30% off a bottom reached on April 8. In the past month, the Russell 2000 index has risen 4%, outpacing the S&P 500’s 3% increase and matching gains in the Nasdaq Composite.
Is ATZ Stock a Buy?
The stock of Aritzia has a consensus Strong Buy rating among 10 Wall Street analysts. That rating is based on 10 Buy recommendations issued in the last three months. The average ATZ price target of $87.25 implies 16.73% upside from current levels.
