Table of Contents
- Introduction
- Why Small-Cap Stocks Have Lagged Behind
- 1. Valuations Are Historically Attractive
- 2. Rate Cuts Could Spark a Repricing Rally
- Performance Comparison: Small-Caps vs Large-Caps
- BlackRock’s Broader Investment Strategy
- Conclusion
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Introduction
While Wall Street continues to favor mega-cap tech stocks, BlackRock, the world’s largest asset manager with over $10 trillion in assets under management, is looking elsewhere for growth in 2025. In a market research note from the BlackRock Investment Institute, the firm outlines why small-cap stocks may be positioned for a strong comeback.
The recent underperformance of small-cap equities particularly those within the Russell 2000 Index has made this asset class one of the most undervalued areas in the U.S. market. BlackRock sees two key catalysts that could unlock significant upside: historic undervaluation and anticipated Federal Reserve rate cuts.
Why Small-Cap Stocks Have Lagged Behin
Over the past two years, small-cap stocks have significantly underperformed their large-cap peers. While the S&P 500 and Nasdaq 100 have posted double-digit returns, small-cap indexes like the Russell 2000 have struggled due to high interest rates, economic uncertainty, and limited global exposure.
These companies tend to be more domestically focused and often carry higher debt levels, making them more sensitive to interest rate hikes. But according to BlackRock, the tides may be turning.
1. Valuations Are Historically Attractive
BlackRock emphasizes that small-cap stocks are trading at multi-decade low valuations. When measured by price-to-forward earnings, small-caps are currently trading at a 30% discount to large-caps, a disparity not seen since the early 2000s.
This creates an opportunity for long-term investors. BlackRock notes that periods of extreme undervaluation have historically preceded strong performance rebounds in small-cap equities.
“Valuations are near historic lows. This is one of the few parts of the market that hasn’t fully priced in recovery,” the firm stated in its latest market outlook.
Additionally, earnings growth among small companies is expected to rebound in the second half of 2025, especially if the economic environment stabilizes.
2. Rate Cuts Could Spark a Repricing Rally
Another reason BlackRock is turning bullish on small-cap stocks is the likelihood of monetary easing by the Federal Reserve. With inflation cooling and the economy entering a disinflationary phase, the Fed is expected to initiate rate cuts in late 2025 or early 2026.
Small-cap companies tend to be more interest rate sensitive than their larger counterparts due to higher leverage and greater exposure to domestic financing. As borrowing costs decline, these firms can expand margins, improve earnings, and attract more risk-tolerant capital.
Historical market data shows that small-cap equities often outperform following the first rate cut in a new monetary cycle. Investors anticipating this policy shift could benefit from early exposure to this market segment.
Performance Comparison: Small-Caps vs Large-Cap
Here’s a snapshot comparing key metrics of small-cap vs large-cap stocks as of Q2 2025:
| Metric | Russell 2000 (Small-Cap) | S&P 500 (Large-Cap) |
|---|---|---|
| Price-to-Earnings (Forward) | 13.2x | 19.1x |
| YTD Performance | +2.8% | +11.4% |
| Average Dividend Yield | 2.0% | 1.4% |
| Debt-to-Equity Ratio (Median) | 1.35 | 0.92 |
| Exposure to U.S. Economy | ~85% | ~65% |
Source: Morningstar, Bloomberg, BlackRock Research
This table illustrates both the valuation gap and the domestic leverage of small-cap stocks. These conditions align with BlackRock’s thesis that rate relief and a U.S.-focused rebound could make small-caps a powerful portfolio addition.
BlackRock’s Broader Investment Strategy
BlackRock has consistently emphasized a more selective approach to equity allocation amid a volatile macro environment. While many institutions continue to pile into large-cap growth names, BlackRock is advocating for diversification through overlooked corners of the market—especially those trading at valuation discounts.
Their recent strategy update suggests increased exposure to:
- U.S. small-cap value stocks
- Cyclicals tied to U.S. consumption
- Companies with positive earnings revisions
This approach aligns with a forward-looking view that anticipates slowing inflation, looser monetary policy, and rotation into undervalued sectors.
For further reading on this topic, explore the official BlackRock Market Insights portal.
Conclusion
BlackRock’s bullish stance on small-cap stocks is a notable deviation from mainstream investment narratives. While much of Wall Street remains fixated on artificial intelligence and mega-cap dominance, BlackRock sees value in areas that have yet to catch up.
With historically low valuations and a potential Fed rate cut cycle on the horizon, small-cap equities may offer one of the most compelling risk-reward profiles for long-term investors in 2025.
For portfolio managers, advisors, and retail investors alike, this may be the right moment to revisit small-cap exposure before broader sentiment shifts.
