FINANCIAL PROFESSIONALS ONLY
U.S. Small-Cap Market Overview
June 30, 2025
Table of Contents
5Year-to-Date Small-Cap Overview as of 6/30/25
62Q25 Sector and Industry Review
7Year-to-Date Sector and Industry Review
9Small-Cap Recoveries Since 1945
11Small-Caps Near Historic Low Versus Large-Caps
12Small-Cap Significantly Cheaper than Mid- and Large-Cap Size Segments
13Small-Caps Generally Have Had Strong Three-Year Returns After Periods of High Volatility
15Historically Small-Cap Cycles Have Averaged More Than a Decade
16Small-Cap’s Weight in the Russell 3000 Is Below Historical Low
17Large-Cap Cycles Peak at Market Tops Crowded with Mega-Caps
18Relative Valuations for Small-Caps vs. Large-Caps are Near Their Lowest in 25 Years
19Wide Breadth of Undervaluation Across the Small-Cap Asset Class
21Large Intra-Year Declines Are Frequent
22Missing the Rally’s Earliest Stage Has Been Costly
23Small-Cap’s Estimated Earnings Growth is Expected to Be Higher Than Large-Cap’s in 2025
24Average Expected Earnings Growth for 2025-2026
25When the Equal-Weighted Russell 1000 Outperformed, Small-Cap Generally Led
26High-Quality and Low-Quality Small-Cap Stocks Have Historically Had Different Performance Profiles
28Key Takeaways for 2Q25 (continued)
Market Overview
Along with the other major domestic indexes, the small-cap Russell 2000 Index enjoyed a welcome rebound in 2Q25, gaining 8.5% after shaking off a wild and bearish first quarter. Throughout the second quarter, which was almost as volatile and uncertain as the previous one, stocks of all sizes exhibited a welcome resilience, in some cases overcoming the steep losses most experienced earlier in the year.
Second-quarter returns did not follow a pattern rooted in market capitalization (which was also the case in 1Q25). The results were similar to prior early-stage rallies for equities in that performance was better for both the most familiar and established names—in this latest instance, mega-caps—and higher growth stocks. The Russell Microcap Index rose 15.5% in 2Q25 while the large-cap Russell 1000 Index was up 11.1%, and the mega-cap Russell Top 50 Index advanced 13.8%. The Nasdaq Composite also fared quite well, gaining 18.0% in the second quarter. (The Russell 1000 and Nasdaq both reached new all-time highs on 6/30/25; the Russell 2000 remained shy of its previous peak on 11/25/24 and was down -10.1% from that peak through 6/30/25.)
Because of the first quarter’s steep declines, year-to-date results for the period ended 6/30/25 were not as consistently positive. Small- and micro-cap stocks remained underwater, with the Russell 2000 falling -1.8% while the Russell Microcap lost -1.1%. The larger-cap indexes did better: the Russell 1000 gained 6.1%, and the Russell Top 50 was up 5.2% for the year-to-date period ended 6/30/25.
2Q25 Small-Cap Overview
The Russell 2000 Growth Index outperformed the Russell 2000 Value Index in 2Q25, advancing 12.0% versus a gain of 5.0% The quarter saw low leverage outperform high leverage, the lowest profitability companies outperform the highest, and dividend payers under perform non-dividend payers.
Year-to-Date Small-Cap Overview as of 6/30/25
With the Russell 2000 trailing the Russell 1000 by a wide margin through the end of June, small-caps experienced their worst first six months to a year ever versus large-caps since each index’s inception on 12/31/78. In the small-cap asset class, two areas stood out: growth performed better than value and highest ROIC declined slightly while lowest ROIC fell by over 300 basis points.
2Q25 Sector and Industry Review
Lead by a rebound in the semiconductors & semiconductor equipment industry, Information Technology was the best performing sector in 2Q25 followed by Industrials and Materials. Real Estate, Utilities, and Consumer Staples all declined for the quarter.
Year-to-Date Sector and Industry Review
Energy, Consumer Discretionary, Health Care, and Real Estate were the greatest detractors to performance year-to-date. While Materials, Utilities, and Industrials advanced.
Russell 2000 Down Markets
While the recent drawdown has been painful, it is, for the moment, below the average of Russell 2000 drawdowns of -15% or greater.
Small-Cap Recoveries Since 1945
The Bear’s Awake. Now What?
Going back to the inception of the Russell 2000, subsequent 6-month and 1-year performance has been quite strong following declines of -25% , averaging 21.7% and 33.9% respectively.
Small-Caps Near Historic Low Versus Large-Caps
Small-Cap Significantly Cheaper than Mid- and Large-Cap Size Segments
Four observations leap out when comparing various segments of the U.S. equity market: 1) Small-Cap Value and Small-Cap Core are the cheapest segments of U.S. equities, 2) these segments are the only ones slightly above their 25-year average valuation, 3) while all three value segments (Small-Cap, Mid-Cap, and Large-Cap) have very similar 25-year average valuations, their current valuations are vastly different, and 4) Mid-Cap Growth, Large-Cap Growth, and overall Large-Cap valuations still have a long way to fall to reach their 25-year average valuations.
Small-Caps Generally Have Had Strong Three-Year Returns After Periods of High Volatility
Historical Perspective
One crucial advantage to having been small-cap specialists for more than 50 years is being accustomed to corrections and bear markets. We have always sought to act on the idea of being greedy when others are fearful and fearful when others are greedy. We also believe that the long-term case for small-caps continues to build, even amid the current market uncertainty.
Regardless of market cap or geography, we expect stock prices to remain volatile as tariff uncertainty clouds the prospects for economic growth in the U.S. and around the world. To be sure, volatility has been a story in and of itself so far in 2025. Looking at the CBOE S&P 500 Volatility Index—aka the VIX or the ‘fear gauge,’—shows an anomalously calm year so far, apart from a significant spike in the aftermath of ‘Liberation Day’ on April 2nd.
Based on history, we do not anticipate volatility remaining as low as it was during May and June, especially with ongoing uncertainty surrounding the rates and implementation of tariffs. While the White House indicated in late June that deadlines may be further extended and that the contours of a deal with China were close, President Trump also threatened Canada and Japan with new tariffs. Yet the impressive recovery for U.S. stocks suggests that investors have learned to expect the unexpected from the Trump Administration—which has so far also been a boon to valuation-conscious investors like us who see volatility as an opportunity.
It’s a challenging exercise during the best of times, but as we look through the noise and think about the long run, we see many small-cap companies with excellent fundamentals and/or strong prospects for long-term growth or recovery that are also selling at attractive prices. To be sure, our investment teams are busy searching for promising bargains, knowing that many investors are not looking at financial and operational fundamentals and/or don’t have long-term investment horizons similar to our own.
At the same time, many small-caps stocks are emerging from a two-year earnings recession, which should help boost performance for the currently lagging, low expectation small-cap asset class. We would further remind our readers that periods of low expectations and relatively underwhelming returns have often been opportune times at which to increase allocations. Missing the early stage of a rally has carried a high cost in previous recoveries.
Historically Small-Cap Cycles Have Averaged More Than a Decade
Secular changes in economic trends, interest rates, and monetary and fiscal policies continue to alter the long-term investment landscape. The winners under the past decade’s zero interest rate, low inflation, and low nominal growth regime will no longer lead. The unfolding macro environment points to the small-cap asset class being able to sustain, not just tactically outperform, large-cap.
Small-Cap’s Weight in the Russell 3000 Is Below Historical Low
Small-cap’s underperformance versus large-cap has reached such an extreme point that small-cap’s weight in the Russell 3000 sits at historical lows not seen since the early 1990s, another indicator suggesting that a sustained small-cap rebound may be coming.
Large-Cap Cycles Peak at Market Tops Crowded with Mega-Caps
Relative Valuations for Small-Caps vs. Large-Caps are Near Their Lowest in 25 Years
Following small-cap’s underperformance of large-cap, the Russell 2000 remains extremely undervalued compared to its relative valuation range over the past 25 years.
Wide Breadth of Undervaluation Across the Small-Cap Asset Class
The disparity in sector valuations in small-cap relative to large-cap is notable and further reflects the idea that the market is defensive.
Small-Cap Market Outlook
We remain confident about the long-term prospects for our chosen asset class. When looking ahead, there’s always far more that we don’t know than we do. Even the best-informed and data-driven observations involve some guesswork. We always think that history is a useful guide, while also being mindful that each historical period comes with its own context; similar conditions may yield markedly different results. And needless to say, our current situation has more than its share of sizable unknowns. There’s the state of our domestic politics and policies, including the still unsettled (as of this writing) federal budget bill, the ultimate arrangement and implementation of tariffs, an increasingly divided electorate, and the prospect of shifting congressional control in 2026. The U.S. consumer continues to spend, but confidence continues to trend downward. The state of geopolitics remains fraught with dangers and risks. Earnings season began in July, and guidance will be even more crucial than usual (and it’s never less than crucial) given the high level of uncertainty surrounding tariffs. There are also bright spots: the effects of reshoring, reindustrializing, and infrastructure improvements have not yet reached their respective ends. As we mentioned above, both the capital markets and economy proved remarkably resilient throughout the challenging first half of 2025.
Against this backdrop, there is also what we do know—and small-cap stocks are what we know best. As of the end of June, the Russell 2000 remained much less expensive than the Russell 1000. Based on our preferred index valuation metric, EV/EBIT or enterprise value over earnings before interest and taxes, small-caps stayed close to a 25-year low relative to large-cap stocks
We welcome a market environment, however challenging, that continues to present our investment teams with highly promising long-term opportunities, which become easier to find at attractively cheap prices when markets are struggling or experiencing elevated volatility. As we move further into the year, we remain highly constructive on the potential for small-cap leadership and for our active approaches to building portfolios.
Amid the difficulties of volatile markets and periods of economic uncertainty, we think it’s crucial to remind investors of the opportunity to build their small-cap allocation at attractively low prices. History shows the rewards that have accrued to investors who had the necessary patience and discipline to stay invested during periods of sluggish or negative performance. We continue to see the currently unsettled period as an opportune time to invest in select small-caps for the long run.
Large Intra-Year Declines Are Frequent
Corrections happen, as seen in the chart below that shows how common intra-year declines have been even in otherwise positive years for small-cap stocks.
Missing the Rally’s Earliest Stage Has Been Costly
While it can be difficult to keep investing when prices are falling, we have seen over the years that panic selling or staying on the sidelines during downturns can be costly over the long run.
Small-Cap’s Estimated Earnings Growth is Expected to Be Higher Than Large-Cap’s in 2025
Consensus EPS estimates for the Russell 2000 are considerably higher than they are for the Russell 1000 in 2025.
Average Expected Earnings Growth for 2025-2026
When the Equal-Weighted Russell 1000 Outperformed, Small-Cap Generally Led
Our research shows that when large-cap returns broaden, small-caps outperform. When the equal-weighted Russell 1000 beat the capitalization-weighted Russell 1000, the Russell 2000 outperformed the large-cap index over the majority of rolling 1-, 3-, and 5-year periods going back to 1984.
High-Quality and Low-Quality Small-Cap Stocks Have Historically Had Different Performance Profiles
Key Takeaways for 2Q25
Market Overview
Along with the other major domestic indexes, the small-cap Russell 2000 Index enjoyed a welcome rebound in 2Q25, gaining 8.5% after shaking off a wild and bearish first quarter. Throughout the second quarter, which was almost as volatile and uncertain as the previous one, stocks of all sizes exhibited a welcome resilience, in some cases overcoming the steep losses most experienced earlier in the year.
Second-quarter returns did not follow a pattern rooted in market capitalization (which was also the case in 1Q25). The results were similar to prior early-stage rallies for equities in that performance was better for both the most familiar and established names—in this latest instance, mega-caps—and higher growth stocks. The Russell Microcap Index rose 15.5% in 2Q25 while the large-cap Russell 1000 Index was up 11.1%, and the mega-cap Russell Top 50 Index advanced 13.8%. The Nasdaq Composite also fared quite well, gaining 18.0% in the second quarter. (The Russell 1000 and Nasdaq both reached new all-time highs on 6/30/25; the Russell 2000 remained shy of its previous peak on 11/25/24 and was down -10.1% from that peak through 6/30/25.)
Because of the first quarter’s steep declines, year-to-date results for the period ended 6/30/25 were not as consistently positive. Small- and micro-cap stocks remained underwater, with the Russell 2000 falling -1.8% while the Russell Microcap lost -1.1%. The larger-cap indexes did better: the Russell 1000 gained 6.1%, and the Russell Top 50 was up 5.2% for the year-to-date period ended 6/30/25.
Historical Perspective
One crucial advantage to having been small-cap specialists for more than 50 years is being accustomed to corrections and bear markets. We have always sought to act on the idea of being greedy when others are fearful and fearful when others are greedy. We also believe that the long-term case for small-caps continues to build, even amid the current market uncertainty.
Regardless of market cap or geography, we expect stock prices to remain volatile as tariff uncertainty clouds the prospects for economic growth in the U.S. and around the world. To be sure, volatility has been a story in and of itself so far in 2025. Looking at the CBOE S&P 500 Volatility Index—aka the VIX or the ‘fear gauge,’—shows an anomalously calm year so far, apart from a significant spike in the aftermath of ‘Liberation Day’ on April 2nd.
Based on history, we do not anticipate volatility remaining as low as it was during May and June, especially with ongoing uncertainty surrounding the rates and implementation of tariffs. While the White House indicated in late June that deadlines may be further extended and that the contours of a deal with China were close, President Trump also threatened Canada and Japan with new tariffs. Yet the impressive recovery for U.S. stocks suggests that investors have learned to expect the unexpected from the Trump Administration—which has so far also been a boon to valuation-conscious investors like us who see volatility as an opportunity.
Key Takeaways for 2Q25 (continued)
It’s a challenging exercise during the best of times, but as we look through the noise and think about the long run, we see many small-cap companies with excellent fundamentals and/or strong prospects for long-term growth or recovery that are also selling at attractive prices. To be sure, our investment teams are busy searching for promising bargains, knowing that many investors are not looking at financial and operational fundamentals and/or don’t have long-term investment horizons similar to our own.
At the same time, many small-caps stocks are emerging from a two-year earnings recession, which should help boost performance for the currently lagging, low expectation small-cap asset class. We would further remind our readers that periods of low expectations and relatively underwhelming returns have often been opportune times at which to increase allocations. Missing the early stage of a rally has carried a high cost in previous recoveries.
Small-Cap Market Outlook
We remain confident about the long-term prospects for our chosen asset class. When looking ahead, there’s always far more that we don’t know than we do. Even the best-informed and data-driven observations involve some guesswork. We always think that history is a useful guide, while also being mindful that each historical period comes with its own context; similar conditions may yield markedly different results. And needless to say, our current situation has more than its share of sizable unknowns. There’s the state of our domestic politics and policies, including the still unsettled (as of this writing) federal budget bill, the ultimate arrangement and implementation of tariffs, an increasingly divided electorate, and the prospect of shifting congressional control in 2026. The U.S. consumer continues to spend, but confidence continues to trend downward. The state of geopolitics remains fraught with dangers and risks. Earnings season began in July, and guidance will be even more crucial than usual (and it’s never less than crucial) given the high level of uncertainty surrounding tariffs. There are also bright spots: the effects of reshoring, reindustrializing, and infrastructure improvements have not yet reached their respective ends. As we mentioned above, both the capital markets and economy proved remarkably resilient throughout the challenging first half of 2025.
Against this backdrop, there is also what we do know—and small-cap stocks are what we know best. As of the end of June, the Russell 2000 remained much less expensive than the Russell 1000. Based on our preferred index valuation metric, EV/EBIT or enterprise value over earnings before interest and taxes, small-caps stayed close to a 25-year low relative to large-cap stocks
We welcome a market environment, however challenging, that continues to present our investment teams with highly promising long-term opportunities, which become easier to find at attractively cheap prices when markets are struggling or experiencing elevated volatility. As we move further into the year, we remain highly constructive on the potential for small-cap leadership and for our active approaches to building portfolios.
Key Takeaways for 2Q25 (continued)
Amid the difficulties of volatile markets and periods of economic uncertainty, we think it’s crucial to remind investors of the opportunity to build their small-cap allocation at attractively low prices. History shows the rewards that have accrued to investors who had the necessary patience and discipline to stay invested during periods of sluggish or negative performance. We continue to see the currently unsettled period as an opportune time to invest in select small-caps for the long run.
The performance data and trends outlined in this presentation are presented for illustrative purposes only. All performance information is presented on a total return basis and reflects the reinvestment of distributions. Past performance is no guarantee of future results. Historical market trends are not necessarily indicative of future market movements. The Russell 2000 Index is an unmanaged, capitalization-weighted index of domestic small-cap stocks. It measures the performance of the 2,000 smallest publicly traded U.S. companies in the Russell 3000 Index. The Russell 2000 Value and Growth indexes consist of the respective value and growth stocks within the Russell 2000 as determined by Russell Investments. The Russell 1000 index is an unmanaged, capitalization-weighted index of domestic large-cap stocks. It measures the performance of the 1,000 largest publicly traded U.S. companies in the Russell 3000 index. The Russell Top 50 Mega Cap Index is an unmanaged, capitalization-weighted index of domestic mega-cap stocks that measures the performance of the 50 largest publicly traded U.S. companies in the Russell 3000 index. The Russell Midcap Index measures the performance of the mid-cap segment of the U.S. equity universe. It includes approximately 800 of the smallest securities in the Russell 1000 Index. The Russell Midcap Value and Growth Indexes consist of the respective value and growth stocks within the Russell Midcap as determined by Russell Investments. The Russell 1000 index is an unmanaged, capitalization-weighted index of domestic large-cap stocks. It measures the performance of the 1,000 largest publicly traded U.S. companies in the Russell 3000 index. The Russell 1000 Value and Growth indexes consist of the respective value and growth stocks within the Russell 1000 as determined by Russell Investments. The Bloomberg Barclays US Aggregate Bond Index is an unmanaged, capitalization-weighted index of investment grade, US dollar-denominated, fixed-rate taxable bonds. Frank Russell Company (“Russell”) is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of Frank Russell Company. Neither Russell nor its licensors accept any liability for any errors or omissions in the Russell Indexes and / or Russell ratings or underlying data and no party may rely on any Russell Indexes and / or Russell ratings and / or underlying data contained in this communication. No further distribution of Russell Data is permitted without Russell’s express written consent. Russell does not promote, sponsor or endorse the content of this communication. The S&P 500 is an index of U.S. large-cap stocks selected by Standard & Poor’s based on market size, liquidity, and industry grouping, among other factors, and includes reinvested dividends. The (Center for Research in Security Prices) CRSP (Center for Research in Security Pricing) equally divides the companies listed on the NYSE into 10 deciles based on market capitalization. Deciles 1-5 represent the largest domestic equity companies and Deciles 6-10 represent the smallest. CRSP then sorts all listed domestic equity companies based on these market cap ranges. By way of comparison, the CRSP 1-5 would have similar capitalization parameters to the S&P 500 and the CRSP 6-10 would have similar capitalization parameters to those of the Russell 2000. Index returns include net reinvested dividends and/or interest income. The performance of an index does not represent exactly any particular investment, as you cannot invest directly in an index. Royce & Associates, LP, the investment advisor of The Royce Fund and Royce Capital Fund, is a limited partnership organized under the laws of Delaware. Royce & Associates, LP primarily conducts its business under the name Royce Investment Partners.
Sector and industry weightings are determined using the Global Industry Classification Standard (“GICS”). GICS was developed by, and is the exclusive property of, Standard & Poor’s Financial Services LLC (“S&P”) and MSCI Inc. (“MSCI”). GICS is the trademark of S&P and MSCI. “Global Industry Classification Standard (GICS)” and “GICS Direct” are service marks of S&P and MSCI.
Notes, Performance and Risk Disclosure
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