‘Worst start to a new year’: Jefferies recaps Russell 2000 performance

Small caps have experienced their worst start to a year since the COVID-19 outbreak in 2020. In the first quarter, the Russell 2000 dropped almost 10%, lagging large and mid caps.

The small- and mid-cap-tracking Russell 2000 index is down almost 17% from its peak on November 25 and is now pricing in “an ugly recession,” says Jefferies U.S. small- and mid-cap strategist Steven DeSanctis, as reported by Seeking Alpha.

In the first three months of 2025 alone, the Russell 2000 retreated 9.8%. For context, the large-cap S&P 500 index lost only 4.6% in the first quarter. DeSanctis points out that Wall Street now expects large caps to outperform their small-cap peers.

It's still too early to tell if the first quarter was a short-term pullback or the start of a prolonged period of falling equities, says Royce Invest. Ten out of the 11 sectors in the Russell 2000 had a negative contribution to the overall index’s performance in the first quarter of 2025 versus the fourth quarter of 2024, when the same number of sectors recorded a positive contribution, according to Royce. 

The only positive contributor at the start of 2025 was utilities. The biggest declines came from IT, industrials, health care, and consumer discretionary, while consumer staples and real estate saw the smallest slides.

For 2025, Jefferies projects growth of 9.8% for small caps versus 10.2% for large caps.

“The Street now sees the third quarter being the turning point for small versus large instead of the second quarter, with small seeing 15.9% growth versus 10.4% for large,” DeSanctis adds.

According to Royce, the most concerning factors for small caps are the Trump tariffs, inflation, and weakening consumer confidence. However, if these concerns prove unfounded and the economy continues to grow, Royce sees strong potential for a prolonged period of small-cap outperformance.