A number of external forces have contributed to the unusual situation. The increased globalization of world markets has favored large companies, which tend to derive more of their sales from foreign sources, and investors often gravitate to blue chips in times of uncertainty.
But a number of factors could be turning the tide. Small company stock valuations are “on the cheap side” next to those of large companies, says Bergson. The threat of tariffs has more of an impact on larger companies, which typically have a stronger foreign sales presence than smaller ones. A strengthening dollar, which makes goods produced in the U.S. more expensive overseas than non-U.S. goods, also hurts small companies less. And Bergson points out that the advance of large company stocks has not been uniform. Financials, for example, have struggled in an environment of low interest rates.
Although he won’t put a time frame on when small caps are likely to outperform large caps, Bergson believes that the “small-cap premium,” which gives those companies an edge, is still in play. “Over the long term, small-cap companies have demonstrated an advantage over large caps. The small-size factor is among several equity factors that research shows have outperformed the broad market dominated by large caps over the past 50 years.”