Will the S&P 400 MidCaps and the S&P 600 SmallCaps (i.e., SMidCaps) finally outperform the S&P 500 LargeCaps this year? Maybe. They’re overdue to do so. However, we think investors would be better off focusing on select SMidCaps sectors rather than the broad indexes. We would overweight the same SMidCap sectors as we recommend overweighting in the S&P 500: Financials, Industrials, and Health Care.
The SMidCaps have been underperforming the LargeCaps since about 2018 (chart). They briefly outperformed in 2020 and 2021 following the Fed's dramatic easing of monetary policy in March 2020 in response to the pandemic. SMidCaps tend to underperform when investors fear a recession is coming, as in 2022 and 2023. But recession fears abated in 2024 and 2025, yet the SMidCaps continued to underwhelm.
The problem is that the forward earnings of both the S&P 400 and S&P 600 have been mostly flat since late 2022, while the forward earnings of the S&P 500 has soared to new record highs (chart). We think it's mostly because LargeCap companies buy the most promising SMidCap companies before their earnings really take off. Then again, we have seen some improvement in the forward earnings of the SMidCaps in recent weeks.
Forward revenues per share have been growing for the S&P 500 and S&P 400 since 2022, but not for the S&P 600 (chart).
While the forward profit margin of the S&P 500 has been rising in record-high territory, the SMidCap's comparable margins remain below their 2022 record highs (chart).
The forward P/Es of the SMidCaps have been much lower than that of the S&P 500 since 2021 (chart). Prior to the pandemic, the former usually exceeded the latter. SMidCaps are relatively cheap because their earnings growth rates have been disappointing.
The Russell 2000 is widely used as a benchmark for small-cap stocks (chart). It is more volatile than the S&P 600 because the former includes lots of companies that have no earnings, including lots of biotechnology firms.
That explains why the Russell 2000 tends to have a higher forward P/E than the S&P 600 (chart).
In recent weeks, industry analysts who cover companies in the S&P 400 collectively have turned a bit more upbeat on the outlook for their earnings in 2026 and 2027, with growth rates at 14.3% and 20.0%, respectively (chart). The forward earnings of the S&P 400 is at a record high.
The Earnings Squiggles for the S&P 600 show that industry analysts expect S&P 600 earnings to increase 15.5% and 3.3% in 2026 and 2027 (chart).
During the first three trading days of the new year, both the S&P 400 and S&P 600 have outperformed the S&P 500 (chart).
