The market-capitalization-weighted S&P500 continues to make record high recently, demonstrating a significant dominance over the small-and-mid-cap index Russell 2000. This momentous trend driven by mega-cap stocks can be traced back to the 2022 post pandemic era, when the stock market started to recover, and the wave of artificial intelligence started to arise. While there may be discrepancies in index valuations periodically, the spread has reached an abnormal high of 18% (figure 1). It is also noteworthy that the current situation shows contradiction with historical performance as small-and-mid cap stocks tend to outperform mega-cap stocks over a longer timeframe, given their higher growth potential in the early stage of development. Therefore, the question of whether the small-and-mid-cap stocks provide investors with undervalued opportunities or the mega-cap stocks dominating the market will become the new normality has come to investors’ mind.
To have a better view on this question, this article will be divided into two halves. The first half examines the reasons behind the strong uptrend of the mega-cap stocks, followed by the second half that discusses the potential brought by the small-and-mid-cap stocks from the macroeconomy and financial market perspective, and the sustainability of the current trend.
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