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The current large cap cycle is the second longest since 1935, with small caps underperforming large caps by 5% on an annualized basis. Has the pendulum swung too far?

Markets tend to be mean-reverting. History shows that when the cycles turn, the catch-up trade in small caps can be powerful. Yet, timing the exact inflection point is nearly impossible, and missing just a handful of the best days can significantly erode long-term returns.

This is why maintaining a dedicated allocation to small caps remains critical for investors seeking to capture the full cycle.

The Last Time Large Caps Outperformed Small Caps by this Margin was in 1999

As of June 30, 2025

Source: eVestment. The 10-Year Rolling Excess Return represents the annualized return of the Russell 2000 Index over the trailing 10-year period minus the annualized return of the S&P 500 Index over the same period. Rolling periods are calculated monthly based on trailing 10-year return data for these indices from 1979 to June 2025.

Small Caps Have Lagged By 5% in the Current Large Cap Cycle

As of June 30, 2025

Sources: Furey Research Partners, FactSet. Based on annualized returns for the Russell 2000 and S&P 500 indices from 1979 to June 2025. Historical returns prior to 1979 represent the Ibbotson SBBI US Small Cap Stocks and the Ibbotson SBBI US Large Cap Stocks indices.

Trailing Performance History Suggests We May Be at an Inflection Point

Source: Furey Research Partners; FactSet. Based on the annualized returns of the Russell 2000 and S&P 500 indices from 1979 to December 2024.

The Key is to Stay Invested

As of June 30, 2025

Russell 2000 Forward 2-Year Annualized Return

Source: Furey Research Partners. Rolling forward two-year returns calculated daily, as of 6/30/2025.

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Disclosures

The opinions expressed herein are those of Aristotle Capital Boston (Aristotle Boston) and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Aristotle Boston reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

All investments carry a certain degree of risk, including the possible loss of principal. Investments are also subject to political, market, currency and regulatory risks or economic developments. International investments involve special risks that may in particular cause a loss in principal, including currency fluctuation, lower liquidity, different accounting methods and economic and political systems, and higher transaction costs. These risks typically are greater in emerging markets. Securities of small- and medium-sized companies tend to have a shorter history of operations, be more volatile and less liquid. Value stocks can perform differently from the market as a whole and other types of stocks. The material is provided for informational and/or educational purposes only and is not intended to be and should not be construed as investment, legal or tax advice and/or a legal opinion. Investors should consult their financial and tax adviser before making investments. The opinions referenced are as of the date of publication, may be modified due to changes in the market or economic conditions, and may not necessarily come to pass. Information and data presented has been developed internally and/or obtained from sources believed to be reliable. Aristotle Boston does not guarantee the accuracy, adequacy or completeness of such information.

Past performance is not indicative of future results. The information provided in this report should not be considered financial advice or a recommendation to purchase or sell any particular security.

Differing historical time periods are selected throughout the presentation as we believe specific periods provide the most informative historical analog for the concepts presented.

The Russell 2000® Index measures the performance of the small cap segment of the U.S. equity universe. The Russell 2000 Index is a subset of the Russell 3000® Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership. The S&P 500 Index is the Standard & Poor’s Composite Index and is a widely recognized, unmanaged index of common stock prices. It is market cap weighted and includes 500 leading companies, capturing approximately 80% coverage of available market capitalization. The volatility (beta) of the portfolios may be greater or less than the benchmarks. It is not possible to invest directly in these indices.

Aristotle Capital Boston, LLC is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about Aristotle Boston, including our investment strategies, fees and objectives, can be found in Form ADV Part 2, which is available upon request. ACB-2509-6