Editor’s Note: I am in the homestretch of a two-week road trip that now has me in Granville, Ohio. Until my wife’s sister moved here a few years ago, I had never heard of the place.

But now that I’m here, I understand why she chose to call this town of 6,300 residents home. It has a small-town coziness that includes an award winning microbrewery and a highly rated public golf course designed by Donald Ross.

Being here is a reminder that bigger isn’t always better. Especially when it comes to the stock market, where good things often come in small packages.

Hiding Out

Until a few weeks ago, small cap stocks were mostly shunned on Wall Street. Fears of a recession triggered by import tariffs had most portfolio managers hiding out in the safety of large cap stocks with fortress balance sheets.

Over the first five months of this year, the small cap Russell 2000 Index was down 7 percent while the large cap S&P 500 Index was up slightly. But since then, it’s been a different story.

During the month of June, both the S&P 500 and Russell 2000 rose roughly 5 percent. That was before President Trump signed his “big, beautiful bill” into law on July Fourth.

In the first three days of this month leading up to that event the Russell 2000 gained another 3.4 percent in anticipation of the bill’s passage. Over the same span, the S&P 500 increased by less than half that amount.

Pent Up Demand

Sales of new homes and cars have fallen steadily over the past three months, ever since the White House announced its “liberation day” reciprocal tariff program in early April. The threat of an economic recession triggered by the tariffs was too daunting to ignore, especially for people working for companies directly impacted by those tariffs.

President Trump quickly walked back that plan after the stock market plunged in response to that announcement. However, consumers remained wary that it would be only a matter of time until the tariffs kicked in and the economy started to weaken.

That is no longer the case. The income tax cuts and other financial incentives included in the bill should spur more consumer spending during the second half of this year.

Keep it Simple

Companies of all sizes would benefit from more consumer spending, but smaller businesses should feel it more. Many of them generate most of their revenue within the United States where the additional spending generated by the bill will occur.

Hence, Wall Streets renewed interest in small cap stocks. If you want to participate in this trend, the simplest way is to buy an exchange-traded fund designed to track small caps.

For example, the SPDR S&P 600 Small Cap Growth ETF (NYSE: SLYG) is managed to “provide investment results that, before fees and expenses, correspond generally to the total return performance of The S&P SmallCap 600^® Growth Index. The Index includes stocks that exhibit the strongest growth characteristics based on sales growth, earnings change to price, and momentum.”

Despite the number in its name, the fund’s portfolio consists of 342 holdings that have a weighted average market cap of $4.1 billion. Its weighted average forward PER (price-to-earnings ratio) of 19.5 is less than the 20.3 multiple for the S&P 500 Index.

COVID Skew

Historically, small cap stocks have traded at a higher PER than large cap stocks due to their economic sensitivity. But that has not been the case recently due to the popularity of large cap tech stocks.

Over the past five years, SLYG has delivered a total return (share price appreciation plus dividends paid) of 61 percent. During the same period, the SPDR S&P 500 ETF (NYSE: SPY) gained 100 percent.

Of course, the coronavirus pandemic skewed those numbers as everyone became more reliant on technology to work, shop, and socialize from home. But those days are over now, and the advances made in artificial intelligence since then should make it easier for small companies to compete with businesses of all sizes.

If I’m right about that, then the recent discrepancy in performance between small caps and large caps is about to reverse. It remains to be seen if the “big, beautiful bill” delivers on its promise, but for now it appears to be exactly what small cap stocks needed.