The recent rally for small-cap stocks could still have room to run due to a valuation gap and the economic environment, according to the top investor at asset management giant Vanguard. Greg Davis, the firm’s president and CIO, told CNBC’s Bob Pisani that the small-cap rebound makes sense from a valuation standpoint and could keep going. “Small caps, to us, still look relatively cheap — relative to some of the large-cap alternatives that are out there,” Davis said. The small-cap Russell 2000 is up nearly 10% in July, while the S & P 500 is flat and the Nasdaq Composite is down 2%. Small-cap value , in particular, has outperformed, including the Vanguard Russell 2000 Value ETF (VTWV) , which is up 11.9%. “We think there’s a lot of room for small cap, in addition to value, to continue to run,” Davis added. The small-cap rally comes after this bull market was mainly led by a handful of Big Tech stocks, including Nvidia and Microsoft . This led to concern on Wall Street about the market being too reliant on just a few names that made up an increasingly large share of the S & P 500. Davis said that while the market does look top-heavy, it has not reached the levels of some historical periods and that investors could look beyond the S & P 500 to dilute that risk. “What we try to tell investors is that you can get broader diversification looking at the total market,” he said. Politics and policy will become key market factors in the back half of the 2024, for both small caps and equities more broadly. On the political front, Davis said investors should “tune out the noise” of the election cycle and focus on their long-term goals. On the policy side, Vanguard expects one Federal Reserve rate cut this year, followed by more in 2025, Davis said. “Going into next year, it’s really going to be dependent upon if we stay on this path of slowing growth, moderating inflation. If that is the case, it’s likely we’ll see additional rate cuts happening next year, which again would be a benefit to the small-cap space,” Davis said. Vanguard is a privately held firm with about $9 trillion in assets under management. It is most famous for its index funds, pioneered by Vanguard founder Jack Bogle, which have helped drive down the cost of investing over the past 50 years. BlackRock veteran Salim Ramji took over as Vanguard’s CEO earlier this month.
