The stock market looks a lot like it did in 1999, but it’s what comes after that investors may want to pay close attention to. Many investors have been troubled by stocks lately. Too concentrated. Too far, too fast. Take tech stocks, which have have sold off this month, with the Nasdaq Composite the biggest laggard among the major averages, down 0.5%. On the other hand, the Dow Jones Industrial Average is the top performer, rallying 1.6%. The opposite story is playing out lower down the size spectrum. The small cap Russell 2000 index has jumped more than 2% this month after recent data pointing to a sluggish labor market and lower interest rates had investors pivoting away from the largecap leaders. Small caps tend to do better with an easing of monetary policy or with an improvement of macroeconomic conditions. For some, that suggests a rotation is starting to play out. Over the next three to five — or even seven — years, “I think the mid cap and the small cap indexes will outperform the S & P 500. That is certainly not a consensus among, like, retail investors,” said Doug Ramsey, investment chief at The Leuthold Group in Minneapolis. “But I do think we’re getting closer to a turning point,” Ramsey added. The highly concentrated S & P 500 is now trading at 22 times the next 12 months’ estimated earnings, drawing comparisons to 1999 and 2000, when the dot-com bubble preceded a crash in tech stocks. But Ramsey suggested investors would do better to heed what comes after 2000, when the market cycle turned toward small- and mid-cap leadership as tech stocks unwound. The Russell 2000 surged more than 110% between 2000 and 2012, for example, while the S & P 500 gained just 31% over the same span. Then, as now, tech stocks were trading at expensive valuations, which had investors casting about for better values, Ramsey said. “That was the story during the last small cap leadership cycle, like from 2000 to 2012. It was a 12-year cycle,” said Ramsey. “Small cap earnings during that period were spectacular,” and the stocks’ price-to-earnings multiple expanded, “while the large cap growth stocks saw a big reversal downward in P/E ratios against earnings that were pretty decent.” “That’s going to be the story of the next leadership cycle,” and will likely include a turn to value stocks from growth companies, Ramsey said. Others have their doubts. Small caps have been cheap for years now, and have failed to catch a bid from investors hypnotized by artificial intelligence. In fact, in spite of the recent weakness, plenty of investors remain confident the megacap complex will continue to outperform, even if not to the same degree that they have the last several years. “Near term, I could see some small cap outperformance,” said Christopher Mistral, director of research at the Stock Trader’s Almanac. “Once the consolidation period is over, and people start to feel a little bit better about mega cap tech valuations again, I would anticipate that they’re going to rotate back into tech.” “It’s been working for a long time,” Mistral said. “Technology, AI, is still the source of growth for the market and the economy.” Still, Mistral noted that the weeks leading up to Labor Day are a seasonally strong period for small caps. And at least some money is rotating into the Russell 2000. Ramsey pointed out that recent data from the Commodity Futures Trading Commission showed that the “smart money” is going long the Russell 2000 to a degree it hasn’t since October 2022. Besides, Ramsey said, the valuation discount is so large that small caps are worth a closer look. “The valuation premiums on the large cap growth stocks, and especially on technology, are just so large that … a lot of the mid- and small cap outperformance could be driven just by that valuation gap” narrowing, he said.
The stock market is drawing comparisons to 1999-2000. Maybe it’s better to think of it as 2000-2012
Aug 20, 2025
