Investors frequently turn to major indices such as the S&P 500, the Nasdaq Composite, and the Dow Jones Industrial Average to gauge how financial markets are faring. While these benchmarks offer a useful starting point, the stock market is composed of thousands of individual companies, each responding to economic and market forces in its own way. To better capture these nuances, stocks are commonly grouped by sector, geography, company size, and investment style. Each of these groupings can serve a meaningful role in long-term portfolios.

Headlines touting new highs for the S&P 500 or Nasdaq gains driven by artificial intelligence can create the impression that all stocks are moving in lockstep. In reality, there is often considerably more happening beneath the surface. This is particularly relevant today, as many key drivers, including AI, oil prices, interest rates, and tariffs, have broad effects that extend well beyond large cap stocks. A deeper understanding of these drivers can help investors stay balanced and keep their portfolios aligned with long-term objectives.

Over the past year, segments such as small caps, value stocks, and international equities have outperformed, and their valuations have generally remained more attractive. Gaining insight into how different sizes and styles have performed can help investors maintain a healthy balance. So, what is taking place beneath the surface of broad market indices, and what does it mean for investors?

Market conditions affect different sizes and styles in distinct ways

Although the overall market has posted double-digit returns this year, at least two significant trends have been unfolding beneath the surface.¹ First, valuestocks have outperformed over the past year, marking a reversal of the trend that prevailed since 2022, when growth stocks delivered strong returns on the back of technology and AI investments.² The distinction between value and growth is an important one for investors, and it has been the subject of extensive academic research over the past 50 years.3 Value is commonly defined as companies with attractive valuation ratios, meaning their prices are low relative to fundamentals such as earnings or sales. Growth, by contrast, refers to
stocks with higher valuations that reflect expectations of rising earnings and expanding market share, often representing trends that investors are enthusiastic about. The specific companies in these categories can shift over time, from dot-com stocks in the late 1990s to AI stocks
today.

Value stocks have outperformed this year for a variety of reasons, including uncertainty surrounding interest rates and strong performance in the Energy sector driven by elevated oil prices.⁴ Interest rates remain near multi-decade highs, which tends to weigh more heavily on growth stocks. This is because their prices are anchored in future growth expectations, and higher interest rates reduce the present value of those future cash flows.

Second, small cap stocks have outperformed large cap stocks this year, reversing a broad trend that had persisted for well over a decade. In fact, prior to this year, small cap stocks had underperformed the S&P 500 since 2020.⁵

Small caps have been strong this year for many of the same reasons as the broader market. AI, for instance, is often viewed as a large cap opportunity, yet many smaller industrial and technology companies supply the equipment, components, and services required to build data centers and other infrastructure. As a result, these businesses are experiencing healthy revenue and earnings growth that rivals many other areas of the market.

One challenge is that small caps tend to be more sensitive to interest rates, given their comparatively limited access to financing relative to large cap companies. This has introduced uncertainty across this group more recently as long-term rates remain elevated and the possibility of Fed rate hikes increases. However, history shows that this relationship is not always straightforward. Two of the strongest periods for small cap relative performance occurred in the late 1970s and the mid-2000s, both of which featured higher interest rates and inflation.6 Part of the explanation is that smaller businesses can sometimes raise prices more readily, which helps support their operating margins.

Valuations play a key role in long-term investing

The significance of different stock market styles goes beyond past returns; valuations are equally important. Over the long run, lower valuations have historically supported forward returns, making it worthwhile to consider all segments of the market.

The stock market is often described as experiencing “regimes,” or periods in which certain investment styles tend to lead. These regimes can last months, years, or even decades. Perhaps the most widely studied example is the dominance of value stocks for much of the 20th century, before growth took over during the dot-com era.

The accompanying chart illustrates the difference between growth and value valuations using the price-to-book ratio. Growth stocks, particularly the largest technology companies, are hovering near historically elevated valuations.7 By comparison, value stocks and smaller companies appear more attractively priced. As always, past performance does not guarantee future results, so these valuation differences do not ensure that value or small caps will continue to outperform. Even so, they help explain why market leadership has shifted and why investors should consider a range of market segments within their portfolios.

The key takeaway is not to attempt to time these shifts, but to recognize that no single trend persists indefinitely. Maintaining an appropriate balance across styles and sizes, rather than chasing recent winners, has historically served investors well.

International markets offer an additional avenue for diversification

The same logic that applies within the U.S. market extends across geographies as well. Just as different sizes and styles respond differently to economic trends, so too do markets around the world. This is why international diversification can be a valuable tool for long-term investors.

Emerging market stocks, for instance, have performed well this year as earnings growth expectations have improved and valuations have become more appealing.8 The accompanying chart shows that valuations for both emerging market and developed market stocks remain well below those of the U.S. across many measures. While U.S. stocks outperformed for much of the past decade, returns since the beginning of last year illustrate how quickly this dynamic can change.

Of course, international investing carries its own set of risks, including geopolitical, currency, and regulatory considerations. These risks are precisely what cause international stocks to behave differently from U.S. stocks over time. That said, many U.S. multinational companies already generate significant international revenues, which naturally provides a degree of geographic diversification. When combined thoughtfully with domestic holdings, international exposure can improve the overall balance of a portfolio.

Ultimately, which parts of the market belong in a portfolio depends on each investor’s specific needs, goals, and risk tolerance. The objective is not to predict whether small caps will continue to lead or whether value stocks will keep outperforming. Rather, it is to recognize that the stock market is far broader than the handful of companies that tend to dominate the headlines.

The bottom line? While major indices offer a helpful starting point, not all parts of the market behave the same way. Maintaining balance across sizes, styles, and geographies is an important step toward building a portfolio that is well aligned with long-term financial goals.

References

^1. S&P 500 Index as of September 11, 2026, ². Clearnomics research and the Russell 3000 Value and Growth indexes, as of September 11, 2026, ^3. Fama and French, 1992, “The Cross-Section of Expected Stock Returns,” https://www.jstor.org/stable/2329112, ^4. Clearnomics research, LSEG and FTSE Russell, as of September 11, 2026, ^5. Clearnomics research and the Russell 2000 Index, as of September 11, 2026, ^6. Banz, 1981, “The Relationship Between Return and Market Value of Common Stock,” https://www.sciencedirect.com/science/article/abs/pii/0304405X81900180, ^7. Clearnomics research, LSEG and FTSE Russell, as of September 11, 2026, ^8. Clearnomics research and the MSCI Emerging Markets Index, as of September 11, 2026

Index Descriptions
S&P 500
The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
Russell 3000
The Russell 3000 Index is a stock market index that tracks the performance of the 3,000 largest companies listed on the U.S. stock exchange.

Russell 2000
The Russell 2000 Index is a capitalization-weighted index designed to measure the performance of the small-cap segment of the U.S. equity universe. It includes approximately 2,000 of the smallest securities in the Russell 3000 Index.

MSCI Emerging Markets Index
The MSCI EM (Emerging Markets) Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of the emerging market countries of the Americas, Europe, the Middle East, Africa and Asia. The MSCI EM Index consists of the following emerging market country indices: Brazil, Chile, Colombia, Mexico, Peru, Czech Republic, Egypt, Greece, Hungary, Poland, Qatar, Russia, South Africa, Turkey, United Arab Emirates, China, India, Indonesia, Korea, Malaysia, Philippines, Taiwan, and Thailand.

MSCI EAFE Index
The MSCI EAFE Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada. The MSCI EAFE Index consists of the following developed country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the UK.

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