Large-cap vs. Small-cap Stocks

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Interpretation

Which performed better in recent years, large-cap or small-cap stocks? Differentiating between these characteristics is a popular way to segment the US stock market (next to growth and value). The term 'cap' refers to market capitalization and is calculated by multiplying the price of a stock by its number of shares outstanding.
Large-cap stocks are generally considered as less risky. These tend to be companies that are very stable and dominate their industry.
Small-cap stocks are generally considered to be riskier and more profitable than large-cap stocks. Many small caps are young companies with significant growth potential but also a higher risk of failure.
The ratio in the chart above divides the Wilshire US Large-Cap Index by the Wilshire US Small-Cap Index. When the ratio rises, large-cap stocks outperform small-cap stocks - and when it falls, small-cap stocks outperform large-cap stocks. The ratio peaked in 1999 during the dot-com mania.

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Small-cap/Large-cap vs. Inflation

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Interpretation

Interestingly, the Small-cap/Large-cap ratio correlates quite strongly with the 10-Year (expected) Inflation Rate, which is calculated as the difference between the Treasury Rate and the TIPS Rate.
According to Aswath Damodaran, historically, small-cap stocks have outperformed large-cap stocks during periods of high inflation, such as the 1970s. It appears that small-cap companies have more flexibility to adjust to inflation. In a podcast he explained, "the more established you are as a company, the more your business model has already been set, the more adjustment is involved when inflation hits you, because you got to change the way you do business."

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The Wilshire Large-cap and Small-cap Indices

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Interpretation

Together, the components of the Wilshire US Large-Cap Index, Wilshire US Small-Cap Index and Wilshire US Micro-Cap comprise the Wilshire 5000 without gaps or overlaps.
The Wilshire 5000 is the broadest of all listed indices on this page. It measures the performance of all U.S. equity securities with readily available price data.
The Wilshire Large-Cap includes the top 750 ranked components of the Wilshire 5000 index measured by market capitalization.
The Wilshire Mid-Cap includes the components between 500 and 1000 measured by market capitalization. Therefore it's considered a benchmark for mid-cap stocks. The components of the Wilshire US Mid-Cap are the bottom 250 Wilshire US Large-Cap securities and the top 250 Wilshire US Small-Cap securities by capitalization.
The Wilshire Small-Cap includes the components between 750 and 2500 measured by market capitalization.
The Wilshire Micro-Cap includes the components ranked below 2500 measured by market capitalization.

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