Weak small caps and strong large caps –again… January turned out to be a very strong month for large caps.
The broad Stockholm Stock Exchange (OMXSPI-GI) rose by 2.1% (large-cap index +5%), while the global equity index (Dow Jones Global Index) gained +3.1%. Just like throughout last year, Swedish small caps once again lagged behind:the small-cap index (Carnegie Small Cap Return Index Sweden) declined by -4.2%.

Small caps increasingly neglected as large caps keep marching on –parallels to “boring stocks” vs. IT stocks during the dot-com bubble
Small caps have continued to be pushed aside while large-cap stocks have kept marching higher. During last year, the theme was clear: small-cap stocks performed weakly while large caps were strong, and the outperformance of the large-cap index versus the small-cap index amounted to 13% –a record as far as we have been able to determine. January further reinforced the same trend.

Over longer periods, however, small caps have historically performed clearly better than large caps, partly due to greater long-term growth potential and partly because large caps are often valued more highly from the outset. As small companies grow and mature, their valuation multiples also tend to expand, further strengthening returns.
In today’s uncertain global environment, investors naturally gravitate toward perceived safe havens –large caps –while reducing exposure to more “uncertain” small caps. This reinforces the narrative of large caps as safe and small caps as risky, creating a feedback loop that can persist for a long time.
But eventually gravity takes over. When valuations become stretched and growth opportunities limited, sentiment can shift quickly, often without a clear bottom.

The opposite is also true: once small caps begin to move higher, interest can return rapidly and create a positive spiral. We therefore see parallels to the dot-com bubble, where today’s large caps resemble the IT stocks of that era, while today’s small caps resemble the “boring” old-economy stocks. When sentiment turnswe do not know –but we are confident in which category we favor over the coming 3–5 years.

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