Small-Cap Stocks Face Bear Market Amid Tariff Concerns

NEW YORK, April 5, 2025 – The stock market is grappling with significant fluctuations following President Donald Trump‘s tariff announcement, particularly affecting small-cap stocks. The Russell 2000 Index, the most widely recognized gauge of small-cap performance, has officially entered bear market territory, declining 22% below its recent peak.

This downturn has particularly impacted small-cap stocks, which were already viewed as undervalued compared to their large-cap counterparts. Experts suggest this presents a potential opportunity for long-term investors. Fundstrat analyst Tom Lee noted that small caps are currently trading at their lowest relative prices since 1999, with valuations diverging further from the S&P 500.

As of April 4, 2025, the average S&P 500 component exhibits a price-to-earnings (P/E) ratio of 26.8 and a price-to-book (P/B) ratio of 4.8. In stark contrast, the Russell 2000 averages a P/E ratio of 17.5 and a P/B ratio of just 1.9. Despite large-cap stocks achieving faster earnings growth recently, the valuation gap raises questions about sustainability.

Historically, such occurrences have signaled favorable conditions for small-cap outperformance. Lee cited that during the last similar valuation disparity, small caps surpassed large caps over the following 12 years by a staggering 113 percentage points.

The current market sentiments suggest that small-cap stocks may benefit from anticipated interest rate cuts. Recent forecasts have shifted dramatically, now estimating five quarter-point cuts from the Federal Reserve this year, which could catalyze a shift in market dynamics.

Despite these insights, market uncertainties persist, and analysts caution that the current turmoil could extend further. The Russell 2000 remains an enticing prospect for patient investors looking to capitalize on potential market corrections.

In the wake of the market sell-off, experts recommend a simple index fund like the iShares Russell 2000 ETF as a viable entry point for those looking to invest in small-cap stocks. Understanding long-term trends and remaining invested might lead to considerable gains as the market stabilizes.