<div id="readability-page-1" class="page"><div> <h2>Key Points</h2><ul><li>Small caps have been plagued by negative earnings growth for years. That has led to significant underperformance relative to the S&amp;P 500.</li><li>S&amp;P 600 earnings growth finally turned positive in 2025 and is expected to accelerate in 2026.</li><li>If earnings growth rates deliver as currently forecast, it could unlock a lot of built-up value in small-cap stocks.</li><li>10 stocks we like better than iShares Core S&amp;P Small-Cap ETF ›</li></ul>It goes without saying that megacap tech has been the dominant U.S. equity strategy for the past several years. Small caps, often touted as diversifiers and stocks with above-average return potential, have been consistent laggards since 2021. They last peaked relative to the S&amp;P 500 (SNPINDEX: ^GSPC) about a decade ago. The chart demonstrates this, using the iShares Core S&amp;P Small Cap ETF (NYSEMKT: IJR), which tracks the S&amp;P 600, and the iShares Core S&amp;P 500 ETF (NYSEMKT: IVV).<img src="https://imageproxy.pbkrs.com/https://g.foolcdn.com/image//query-dXJsPWh0dHBzOi8vbWVkaWEueWNoYXJ0cy5jb20vY2hhcnRzL2MxZDFkNGEyYTQwYjZiMDhjNTVkNzBjNDM2MGM1NmRiLnBuZyZ3PTcwMA?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" width="700" height="428" original-src="https://imageproxy.pbkrs.com/https://g.foolcdn.com/image//query-dXJsPWh0dHBzOi8vbWVkaWEueWNoYXJ0cy5jb20vY2hhcnRzL2MxZDFkNGEyYTQwYjZiMDhjNTVkNzBjNDM2MGM1NmRiLnBuZyZ3PTcwMA"/>Will AI create the world's first trillionaire? Our team just released a report on the one little-known company, called an &#34;Indispensable Monopoly&#34; providing the critical technology Nvidia and Intel both need. Continue »Fundamental Chart data by YChartsOne of the core drivers of this trend has been earnings growth. If the S&amp;P 500 were to deliver on its current forecast of 11% earnings growth in the first quarter of 2026, it would mark the 11th consecutive quarter of positive year-over-year earnings growth and the sixth straight quarter of double-digit earnings growth. The S&amp;P 600 Small Cap Index, however, has been on the opposite end of the spectrum. From Q1 2023 to Q2 2024, it produced year-over-year earnings growth of -10% or worse in six straight quarters. It only just turned positive again in Q2 2025. But the momentum may only be starting to pick up for small caps.<img src="https://imageproxy.pbkrs.com/https://g.foolcdn.com/image//query-dXJsPWh0dHBzOi8vZy5mb29sY2RuLmNvbS9lZGl0b3JpYWwvaW1hZ2VzLzg2MDQwMC9nZXR0eWltYWdlcy0xMjgzMzQyNzU4LmpwZyZ3PTcwMA?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" width="700" height="466" original-src="https://imageproxy.pbkrs.com/https://g.foolcdn.com/image//query-dXJsPWh0dHBzOi8vZy5mb29sY2RuLmNvbS9lZGl0b3JpYWwvaW1hZ2VzLzg2MDQwMC9nZXR0eWltYWdlcy0xMjgzMzQyNzU4LmpwZyZ3PTcwMA"/>Image source: Getty Images. <h2>Small caps are about to outpace large caps in earnings growth</h2>If the S&amp;P 600 can deliver on current forecasts, it will generate 29% year-over-year earnings growth in the fourth quarter of this year. The Nasdaq-100, the benchmark for megacap tech, is expected to produce 28% earnings growth over the same period. In other words, small-cap earnings growth could soon begin to outpace that of the tech sector.That's important because small-cap performance and valuations have been a product of subpar earnings. The iShares Core S&amp;P Small Cap ETF, which tracks the S&amp;P 600, trades at a price/earnings (P/E) ratio of 18. The iShares Core S&amp;P 500 ETF trades at a P/E ratio of 28.That kind of valuation gap is understandable when the S&amp;P 500 is delivering such better earnings growth. But when earnings growth rates are similar, the valuation gap should be much tighter. The P/E ratio on small caps has moved modestly higher over the past few years, but the discount relative to the S&amp;P 500 still hasn't budged much. It certainly hasn't repriced to the level it should, given forward earnings growth expectations.I wouldn't expect large caps and small caps to be trading at similar P/E ratios anytime soon. But I also believe there's a level of value in the S&amp;P 600 that hasn't been unlocked yet. Once it does, I think there's a good chance we see an extended stretch of outperformance for small caps relative to large caps.Over the next couple of years, I think small caps are the better bet in the U.S. equity category.<h2>Should you buy stock in iShares Core S&amp;P Small-Cap ETF right now?</h2> Before you buy stock in iShares Core S&amp;P Small-Cap ETF, consider this: The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and iShares Core S&amp;P Small-Cap ETF wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years. Consider when Netflix made this list on December 17, 2004... if you invested $1,000 at the time of our recommendation, you’d have $513,407!* Or when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $1,123,237!* Now, it’s worth noting Stock Advisor’s total average return is 938% — a market-crushing outperformance compared to 188% for the S&amp;P 500. Don't miss the latest top 10 list, available with Stock Advisor, and join an investing community built by individual investors for individual investors. See the 10 stocks » *Stock Advisor returns as of March 18, 2026. David Dierking has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends iShares Core S&amp;P Small-Cap ETF. The Motley Fool has a disclosure policy. The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc. </div></div>

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The S&P 600 Small Cap Index is poised for a significant rally as earnings growth turns positive for the first time in years, with forecasts suggesting a 29% year-over-year growth in Q4 2026. This contrasts with the S&P 500's expected 11% growth, indicating a potential shift in performance dynamics. The valuation gap between small caps and large caps remains wide, but as earnings growth aligns, small caps may unlock substantial value, leading to outperformance in the U.S. equity market over the next few years.

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The S&P 600 Is About to Do This for the First Time in Years. It Could Lead to a Huge Rally for Small Caps.