Nvidia (NVDA, Financials), Apple (AAPL, Financials) and Microsoft (MSFT, Financials) now boast individual valuations of more than $3 trillion, a level of market dominance that puts the top five companies in the S&P 500 collectively at nearly 4.4 times larger than the entire Russell 2000 Index, according to a recent Jefferies analysis.
Jefferies analysts see a robust comeback for small-cap stocks, despite this concentration of value in mega-cap companies. They estimate that the Russell 2000 would rise 13.5% to 2,715 by the end of 2025.
For small caps, which have lagged behind big caps for eight years in a row, the forecast points to a possible turning point. Jefferies expects 13% growth in the Russell 2000 in 2025, slightly lower than current expectations of 16% but still higher than large-cap growth forecasts. The research also shows that small cap prices have risen; historically, the forward price-to-earnings ratio now falls in the 95th percentile. Analysts said these higher values would make absolute performance weaker in the near term.
Jefferies pointed out that the difference in price-to-sales ratios highlights the clear discrepancy, even though small caps remain very cheap compared to their large-cap counterparts. With an average price-to-sales ratio of 9.4 times, the top five S&P 500 companies had a significantly higher average than the Russell 2000 by twice as much. Despite this difference, Jefferies emphasizes that elements such as better balance sheets, less regulatory pressure under the new government and a strong M&A environment could boost small cap momentum in the coming year.
With the top 10 components now accounting for 33.3% of the index's total weight, at a record peak, the survey also highlighted market concentration within the Russell 2000. While analysts remain hopeful of further overall gains through 2025, these could The market's dynamic and higher valuations may limit the upside potential for small caps. The Russell 2000's comeback would mark a marked turnaround after years of underperformance, in line with Jefferies' prediction that a more favorable environment would develop for small-cap stocks.
This article first appeared on GuruFocus.
