MW All the pain for none of the discount: Why small caps are so toxic right now

By Steve Goldstein

It's a brutal time in small-cap land even as the broader stock market hits new records.

The iShares Russell 2000 ETF IWM has underperformed the S&P 500 tracker SPY for five straight days, and it's looking like Thursday will see that run stretch to six. The earnings surprises from Meta Platforms and Microsoft sent S&P 500 futures (ES00) up 0.9% - its best day in a month - as Russell 2000 futures (RTY00) slipped 0.3%

The small-cap index RUT is barely positive on the year, vs. the 8% gain for the S&P 500 SPX.

Yet they're not even that cheap - the S&P 500 is now trading on 24 times this year's earnings, according to FactSet; the Russell 2000 is trading on 28 times 2025 earnings.

The reasons for the split were plain to see in the GDP report released Wednesday. Neil Dutta on Renaissance Macro illustrated that the U.S. is barely growing outside the AI investment surge, whose profits so far have accrued to just a handful companies.

Information processing equipment plus software has overtaken consumer spending as a contributor to economic growth, if the first two quarters of the year are averaged out, Dutta calculates.

At the same time, the AI-related splurge gives more reason for the Federal Reserve to keep interest rates high despite weakness in housing and slowing private-sector jobs growth.

And these small caps are in need of financing, as opposed to the S&P 500 tech giants that can largely fund their own investment out of their own cash flow. S&P 500 net debt to EBITDA is 1.47, compared to 3.85 for the Russell 2000, according to FactSet.

-Steve Goldstein

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July 31, 2025 05:55 ET (09:55 GMT)

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