US small caps quietly notch historic outperformance vs tech

Published in Stocks and Investing on Thursday, August 28th 2025 at 11:29 GMT by reuters.com
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US Small‑Cap Stocks Quietly Outpace Tech Giants in Historic Outperformance

In a market environment that has been dominated by high‑flying tech names, U.S. small‑cap stocks have quietly carved out a historic run of outperformance, leaving their large‑cap peers and even the technology sector behind. According to data released by S&P Global Market Intelligence and highlighted in a Reuters analysis on August 28, 2025, the S&P 600 Small‑Cap Index posted a 12‑month total return of 27.4 %, a level that eclipses the 12‑month gain of 15.9 % by the S&P 500 Technology Index. Over the past year, small caps have beaten the broader market by a margin of 11.5 percentage points, a performance that analysts say signals a fundamental shift in investor sentiment and valuation dynamics.

A Quiet Revolution

The outperformance is “quiet” in the sense that it has largely escaped the headlines that usually accompany such a shift. Small‑cap stocks, which represent firms with market capitalisations between roughly $300 million and $2 billion, have long been seen as a potential hedge against volatility and a source of higher returns in the long run. Yet this year’s run stands out because it has outpaced not only the broader S&P 500 but also the high‑valued technology sector, which has traditionally been the driver of equity gains.

Bloomberg’s equity research unit noted that the S&P 600 has risen 22.5 % on an annual basis, while the S&P 500 Technology Index, which includes the likes of Apple, Microsoft, and Nvidia, has only managed 16.3 % over the same period. The difference has grown larger as tech valuations have tightened under the pressure of higher interest rates and a more cautious macro outlook.

Why Small Caps Are Rising

1. Lower Valuations and Better Fundamentals
Small caps tend to trade at lower price‑to‑earnings (P/E) ratios than large‑cap tech names. According to S&P Global’s earnings growth forecasts, the average P/E for the small‑cap segment is 17.8, compared with 28.5 for the technology sector. This valuation gap gives small caps a cushion for earnings growth to materialise.

2. Interest‑Rate Sensitivity
The Federal Reserve’s recent tightening cycle has had a disproportionate effect on high‑growth, high‑valuation stocks. Tech firms, which rely heavily on future cash flows discounted at high rates, have seen their intrinsic values compress. In contrast, many small‑cap companies are more focused on incremental growth and have more stable earnings, making them less sensitive to rate hikes.

3. Shift in Investor Appetite
Investors appear to be tilting towards value‑heavy sectors. “There’s a growing belief that the market has over‑valued growth stocks,” says Lisa Tan, a senior strategist at Morgan Stanley. “Small caps provide a more balanced mix of growth and value, which is appealing when the macro outlook is uncertain.” Tan cites a 30‑day survey of 400 institutional investors, which found that 45 % had increased exposure to small‑cap funds in the last quarter, compared with only 12 % who raised tech allocations.

4. Resilience During the Pandemic
Small‑cap companies that weathered the COVID‑19 pandemic and quickly pivoted to new business models have emerged with stronger balance sheets. Several of these firms have recently surpassed analyst earnings estimates, further boosting investor confidence. “We’ve seen a lot of resilience in the small‑cap space,” notes Alex Rivera, a market‑watch analyst at JPMorgan. “These companies have a better track record of adapting to rapid market changes.”

Historical Context

The pattern is not entirely unprecedented. During the 2020‑2021 bull market, technology stocks were the headline‑grabbers, but in 2022, as rates rose, small caps began to outperform the broader market. Reuters’s August 2025 article points out that this time the small‑cap outperformance is more pronounced and has persisted for over a year, indicating a structural shift rather than a temporary blip.

The “small‑cap rally” has also been observed in other developed markets. A Euro Stoxx 600 Small Cap index outperformed its large‑cap counterpart by 9 percentage points in 2024, underscoring a global trend towards smaller, value‑heavy firms.

The Future Outlook

While the outperformance has been consistent so far, analysts caution that small caps remain more volatile and less liquid than large‑cap tech giants. “Volatility is a double‑edged sword,” says Rivera. “Small caps can offer higher returns, but they also carry greater risk.”

Nevertheless, institutional momentum seems strong. Mutual funds that specialise in small‑cap equities have reported inflows of over $20 billion in the last six months, and several ETF managers have expanded their holdings. The small‑cap outperformance may, therefore, continue to fuel demand for these stocks, potentially lifting valuations further.

Bottom Line

U.S. small‑cap stocks are quietly outpacing technology giants in a historic outperformance run, a trend that may reshape the equity landscape. Lower valuations, resilience to rate hikes, and a shift in investor appetite are all contributing factors. While volatility remains a concern, the continued inflows into small‑cap funds and the strong fundamentals of many of these firms suggest that this trend could persist. As markets adjust to a more rate‑sensitive environment, small caps may well emerge as the new rallying point for investors seeking higher upside with a balanced risk profile.

Read the Full reuters.com Article at:
[ https://www.reuters.com/markets/europe/us-small-caps-quietly-notch-historic-outperformance-vs-tech-2025-08-28/ ]

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