As Small Caps Lag 20% Behind S&P 500, Reddit User Says Market Cap Definitions 'Should Really Be Readjusted For Inflation'

In a recent discussion on Reddit, users are debating the necessity of adjusting market cap definitions to account for inflation.

Small Cap Value has never been more brutal

This topic has garnered attention as small-cap value stocks lag significantly behind the S&P 500, underperforming by over 20%, as highlighted by Redditor AbuSaho.

Also Read: S&P 500 Index Year-End Target Raised To 5,600 By Goldman Sachs On Strong Tech Earnings And Valuation Expansion

Chart: Benzinga Pro

The SPDR S&P 600 Small Cap Value ETF SLYV, representing small cap value stocks in the U.S., is down 8.31% YTD, while the broad U.S. equity market-tracking SPDR S&P 500 ETF SPY has gained 14.19% over the same period.

The Call For Change: Adjusting Market Cap Definitions

One Redditor argues that market cap definitions are outdated and should be revised to reflect the current economic landscape.

The key points include:

1. Outdated Thresholds:
   • Market cap categories such as small, mid, and large caps were established in a different economic context and have not kept pace with inflation. The traditional classification system may no longer accurately represent the size and economic impact of companies today.
2. Need for Adjustment:
   • The Redditor suggests revising market cap thresholds to better align with today’s inflation-adjusted values. They believe that this change could provide a more accurate representation of a company’s size and financial health, aiding investors in making more informed decisions.

Redditor ShadowLiberal said “the definition of a small/mid/large cap should really be readjusted for inflation,” citing his reasoning as to why small caps may be underperforming:

Comment
byu/AbuSaho from discussion
instocks

Performance Discrepancies: Small Cap Value Vs. S&P 500

The performance gap between small-cap value stocks and the S&P 500 is a key factor in this debate. Notable points from the discussion include:

1. Underperformance:
   • Small-cap value stocks have lagged behind the S&P 500 by 20%, raising concerns among investors. This underperformance prompts a reevaluation of investment strategies and benchmarks.
2. Impact on Investment Decisions:
   • The outdated market cap definitions may mislead investors about the true potential and risk of small-cap stocks. Adjusting these definitions for inflation could lead to better investment decisions and portfolio allocations.

Redditor Doin_the_Bulldance shed light on the indexation perspective, highlighting less liquidity as a key reason behind this discrepancy:

Comment
byu/AbuSaho from discussion
instocks

Portfolio Implications For Investors

1. Portfolio Reassessment:
   • Investors might need to reassess their portfolios based on new, inflation-adjusted market cap definitions. This adjustment could uncover new growth opportunities and better risk management.
2. Benchmark Accuracy:
   • More accurate market cap categories would improve benchmark comparisons, offering clearer insights into market performance. Investors could benefit from a more precise understanding of market trends and sector performance.

The Reddit discussion highlights a critical issue in the investment world: the need to adjust market cap definitions for inflation.

With small-cap value stocks significantly underperforming the S&P 500, this debate underscores the importance of evolving financial metrics to reflect current economic realities. Investors should consider these insights when planning their portfolios to ensure they are aligned with modern market conditions.

Read Next: US Stocks Are ‘Overpriced’, Warns Peter Schiff: ‘If You Know You Can’t Do Your Own Homework Then …’

Image generated using artificial intelligence via Midjourney.