James Picerno: Small-Cap Stocks Lead with Real Positive Earnings This Year, Differing from the 'Less Loss' Leadership of 2022
As of November 4, the iShares Core S&P Small-Cap ETF (IJR) has gained 20% year-to-date, significantly outpacing the SPDR S&P 500 ETF (SPY)'s 13.3% advance. James Picerno points out that, unlike in 2022 when small-caps led relatively only because they 'fell less,' this year's small-cap strength is driven by stronger positive returns, with both value and growth segments outperforming the benchmark. Key drivers include earnings growth for the Magnificent Seven being surpassed by the other 493 S&P 500 companies, and market-cap weighting masking broader market strength. A key validation point is whether IJR can break above its August high.
The small-cap rally in 2026 has a key distinction from past episodes. As of November 4, the iShares Core S&P Small-Cap ETF (IJR) has gained 20% year-to-date, while the SPDR S&P 500 ETF (SPY) has advanced 13.3%. James Picerno emphasizes in The Capital Spectator that this means small-cap stocks are generating stronger positive returns, rather than merely achieving relative ranking gains by 'falling less than large caps' as was the case in 2022.
This distinction is not trivial. In 2022, when small-caps led for the year, the entire market was declining; small-caps simply fell less. If the same pattern were to continue this year, small-caps' relative advantage would vanish once the market rebounds. However, the current landscape is different: both small-caps and large-caps are rising, but small-caps are rising more. Picerno argues that this structure of 'both sides posting positive returns, with small-caps stronger' is more likely to persist than the structure of 'both sides posting negative returns, with small-caps losing less.'
Two mechanisms support this judgment. First, earnings growth momentum has inverted. FactSet estimates that the Magnificent Seven reported lower earnings growth than the other 493 companies in the S&P 500 in the third quarter, and expects this trend to continue into the fourth quarter—projecting earnings growth of 22.6% for the Magnificent Seven versus 30.8% for the rest of the index. Second, the market-cap-weighted structure is masking broader market strength. When several mega-cap technology stocks underperform, their outsized weights in the index drag down the overall performance of the S&P 500, causing the relative strength of equal-weight indices (RSP) and mid- and small-cap sectors to be underestimated.