
Insights: Has the small-caps bull case run its course?

The pace at which ASX-listed shares have advanced in recent months suggests a growing void between large and small-cap stocks, and this has become even more evident since August, with trend lines suggesting the emergence of two-speed growth for equities. Admittedly, it’s no secret that small caps have been leaving their large cap counterparts in the dust for a while now. After all, the Small Ords Index is up 18.5% over one year while the ASX 200 is up 7.7% over the same time frame. However, the degree to which the two indices have been diverging has been widening in the last few months. The ASX 200 has struggled to move 4% higher since early August, while the Small Ords Index is up around 13% on the back of lower interest rates, better economic signals and earnings expectations that exceed those of large caps. This is a complete reversal of the 23% underperformance experienced by small caps in the three years after Covid, when interest rate rises, inflation and small cap earnings downgrades attracted investors to more liquid large cap stocks. While the recent recovery staged by small-cap stocks has been well supported by the market, there’s now growing concern that this part of the market is looking a little topp