Russell 2000 vs S&P 500 vs Nasdaq — Valuation Decides the Winner

The same two indexes, opposite winners

The clearest thing that came out of the backtest I ran myself is this: whether the Russell 2000 or the S&P 500 wins is decided not by the index itself, but by when — at what valuation — you started.

Imagine steadily putting $100 a month into three things: the Russell 2000 (an index of about 2,000 smaller companies), the S&P 500 (the 500 largest by market cap), and QQQ (the Nasdaq, heavy on tech). Run it across different stretches of history and one pattern jumps out that changes everything.

Option A: when the S&P 500 wins

The S&P dominates when you start cheap.

Look at March 2009, the very bottom of the financial crisis, when large stocks were dirt cheap and hated. Dollar cost averaging from that cheap starting point to today handed you 14.79% a year on the S&P. Buying once and just holding gave 16.86%. The Nasdaq was even better: 20.25% averaging in, 22.28% as a lump sum.

Over the same window, the Russell 2000 did 11.32% averaging in and 14.75% as a lump sum. Excellent — but it trailed the large caps, because in 2009 the large caps were overwhelmingly cheap.

Option B: when the Russell 2000 wins

The Russell leads in the opposite case: when you start expensive.

Start at the peak of the dot-com bubble in 2000 — a moment, a lot like today, when the market was wildly overvalued. Averaging in from 2000 to 2012, the S&P earned under 5% a year while the Russell 2000 did about 7%. The smaller companies won because they were a lot cheaper.

You might shrug at "2%," but compounded over 12 years that's nearly a 30% difference. That's not small.

The gap for buy-and-hold is even more dramatic. Over that window the Russell 2000 returned 5.58% a year, the S&P 1.67%, and the Nasdaq -2.55%. The Nasdaq fell 80% and the S&P fell 50-something percent, but the Russell just kept holding up.

What about the Nasdaq — returns aren't everything

A fair question: "The Nasdaq beat both in each window, so why not just buy the Nasdaq?" Our team asked exactly that. The answer is volatility.

The Nasdaq saw an 80% drawdown in the dot-com crash. Over the same stretch the Russell fell less than 20%. The return numbers make the Nasdaq attractive, but whether you have the stomach to keep hitting the buy button at the bottom of an 80% drop is a completely different question. Most investors break right there.

To be clear, I'm not against the Nasdaq. Once QQQ falls hard and becomes reasonably priced, I'll add it to my low-cost averaging without hesitation. Pay reasonable prices, and tech will lead the market's gains in the future.

The three indexes at a glance

Starting point / method	Russell 2000	S&P 500	Nasdaq (QQQ)
2000 peak, averaging in	~7%	<5%	highest
2000 peak, lump sum	+5.58%	+1.67%	-2.55%
2009 bottom, averaging in	11.32%	14.79%	20.25%
2009 bottom, lump sum	14.75%	16.86%	22.28%

Same two assets, and only the start date changed — yet the winner flips entirely. Starting valuation decides almost everything.

The rotation may already be starting

What's exciting is that this rotation may already be underway this year.

Cheaper, steadier value stocks are crushing the expensive, fast-growing ones. Value is up about 15% this year while growth is up only about 2.5% — the widest gap since 2022. Small caps have been hitting fresh record highs, and on one recent day you could watch the money move in real time: boring financial stocks jumped about 1.5% while hot tech stocks fell more than 2%.

While the equal-weight S&P (every company counts the same) and the Russell 2000 both hit all-time highs, giants like Meta, Microsoft, and Amazon actually lagged by a wide margin. Value stocks trade around 14 times earnings; growth trades near double that, close to 30.

For the record, value investors like me don't split companies into "value" and "growth" — they're two sides of the same coin. What matters here is that the S&P and Nasdaq are far more overvalued today than the Russell 2000.

The bottom line: expensive or cheap right now?

So the real question isn't Russell or S&P. It's much simpler: are we starting expensive or cheap?

By the Buffett Indicator, we're among the most expensive levels in history — higher than at the dot-com crash. Today looks far more like 2000 than 2009. And if history rhymes even a little, that points toward the Russell 2000, not the S&P, for the next decade.

Related: The S&P 500 Is More Expensive Than Before the Dot-Com Crash