How IWM, Small Caps Can Beat Mag 7 in 2024
Small cap stocks offer investors growth potential at a reasonable price.
The bulls are back and there are more of them.
While the Nasdaq 100 stocks, specifically the so-called Magnificent 7, are still leading the bull charge in 2024, small-cap stocks are beginning to join the herd and may have more room to run with less downside risk.
The iShares Russell 2000 ETF (IWM) closed the 2023 performance gap on the Mag 7-heavy Invesco QQQ Trust (QQQ), as both rose a little more than 19% over the past three months through Jan. 23. This is a marked change from 2023’s differential of 55% for QQQ versus IWM’s 17%.
On Tuesday, following a new all-time high for the S&P 500, the major market averages moved modestly higher, but it was IWM, the Russell 2000 index small-cap stock proxy, that ranked first with a gain of more than 2%. Investors may be starting to look beyond the Magnificent 7 to participate in a potential 2024 bull market is a healthy sign.
While IWM and small-cap stocks are far from their all-time highs set in 2021, continued rotation of this kind signals that investors are growing more confident in a soft landing that would combine a resilient economy with lower inflation and lower interest rates.
How IWM, Small Cap ETFs Can Outperform in 2024
IWM and small-cap stocks started 2024 with one big advantage over QQQ and large-cap growth stocks—valuation. The average price/earnings ratio for stocks in the IWM ETF began 2024 at a reasonable 15, whereas the P/E for QQQ perched at a lofty 25. Bulls love momentum, but growth at a reasonable price can look more attractive in a growing but slower economy, where interest rates are declining.
Environments that favor value investing strategies may benefit small-cap stocks, because investors seeking undervalued or overlooked opportunities may find attractive options among smaller companies with growth potential.
Furthermore, environments with low interest rates can benefit small-cap stocks because when interest rates are low, borrowing costs shrink, which can be particularly advantageous for smaller companies seeking capital for expansion.
While much may change with the economy and capital markets in the coming months, small-cap stocks look more attractive to value-minded bulls than large-growth stocks do in 2024.
