Why This Chart?
For nearly a decade and a half, small cap stocks have been the market's forgotten stepchild. Academic research — most notably Eugene Fama and Kenneth French's work on the size factor — has documented that small cap stocks have historically outperformed large caps over long time horizons, even though any single decade can buck that trend. Since the 2011 peak in relative performance, small caps — represented here by IWM, the Russell 2000 ETF — have steadily ceded ground to the S&P 500, culminating in a low point last summer when small caps were trading at their weakest relative level versus large caps since before the 2008 financial crisis. But the ratio has quietly turned. Since bottoming in July 2025, IWM has outperformed SPY on a relative basis for eleven straight months, closing June 2026 at its highest relative reading since early 2024. Long periods of small cap underperformance have historically been followed by extended periods of outperformance — the question is whether this is the start of that next cycle.
Key Themes to Watch
- The relative low may be behind us — and the trend has held. IWM/SPY bottomed at 91.9 in July 2025 and has climbed to 106.4 by June 2026, posting higher relative readings in nine of the last eleven months. This is now a trend measured in the better part of a year, not a single-quarter blip.
- Concentration risk in large cap is a structural tailwind for diversification. With mega-cap tech dominating S&P 500 weighting, a rotation toward small cap doubles as a de-concentration trade for portfolios overweight the top 10.
- The valuation gap remains historically wide — and history counsels patience over timing. A similarly wide valuation gap opened during the late-1990s Nasdaq bubble, and small caps went on to deliver solid returns through the S&P 500's subsequent "lost decade." Prior small cap recovery cycles have played out over multiple years, not months — this is a trend to monitor, not a signal to chase.
This Week's Chart — IWM vs. SPY Relative Performance
IWM vs. SPY relative performance, May 2000–June 2026, indexed to 100 at inception. Source: EODData.com. Calculations by Bellaire Capital Management, LLC.
