In sports, momentum is rarely subtle. A turnover before halftime. A three-pointer that silences the home crowd. A sudden defensive stop that changes the rhythm of the game. You can feel it before the scoreboard fully reflects it. The energy shifts. The confidence moves. What looked inevitable moments ago suddenly feels uncertain.

Markets move in similar cycles. Investors gravitate toward what has been working, reinforcing trends that can persist for years. Winning teams attract more fans; winning stocks attract more capital. Leadership becomes concentrated. Narratives harden.

But just as in sports, momentum can stall, and sometimes reverse. The question is rarely whether a shift will happen. It’s when.

For more than a decade, U.S. large caps have dominated the equity landscape. Small caps, by contrast, have largely trailed. Yet early 2026 performance hints at something different. It may be noise. Or it may be the first signal that leadership in U.S. equities is beginning to rotate.¹

A Nearly 13-Year Drought—and a Very Different Start to 2026

The WisdomTree U.S. SmallCap Quality Dividend Growth Fund (DGRS) has faced a difficult performance environment in recent years. In our experience, investors tend to focus first on the S&P 500 Index or similar large-cap-oriented domestic strategies. Small caps represent adding something different. Figure 1a shows two very distinct things, in my opinion:

1. Across the one-, three-, five-, 10- and ‘Longest Common’ periods,² DGRS's performance has significantly lagged that of the S&P 500 Index. This is notable in the context of equity factor discussions. Small caps can be riskier, but historically, in certain periods, that additional risk has been rewarded with stronger performance. Over this period, which stretches nearly 13 years, DGRS has not exhibited outperformance against the S&P 500 benchmark.
2. Then, we look at the Year-to-Date period, which represents the start of 2026 through February 12 and we see a completely different story. We don’t know if that story will persist, but it’s important to keep an eye on it since it could portend a dramatic turn in U.S. equity market leadership.

Figure 1a: A Nearly 13-Year Gap—and a Very Different Start to 2026

Figure 1b: Standardized Performance

Two Wins. Ten Losses. The Calendar-Year Reality.

Viewed year by year, the pattern feels less like randomness and more like a long stretch of large-cap dominance interrupted by brief counter-moves. Since 2014, DGRS has led in just two calendar years: 2016 and 2022. Both were meaningful, but they were also short-lived. In 2016, small caps surged decisively ahead. In 2022, they provided valuable downside resilience in a difficult market. Yet outside of those moments, the S&P 500 consistently reasserted leadership, particularly during the powerful rally after Covid-19 and leading into the robust generative AI environment that began in November 2022.³

The takeaway isn’t that small caps never lead. We know that they clearly can. It’s that leadership has been episodic, not sustained. After more than a decade of relative underperformance, the more relevant question may be whether we might be due for a shift in leadership that may have a longer shelf life.

Figure 2: Long Stretches of Lag, Short Bursts of Leadership

The Valuation Gap Is Striking

While we can never be sure of what forward-looking performance will bring in any investment strategy, what we can do is note the fundamental picture visible at present. Some of these statistics are staggering, in my opinion:

• Estimated P/E Ratio: DGRS exhibited a 13.0x, which was roughly 10.0x below that of the S&P 500 Index.
• Price/Cash Flow Ratio: DGRS exhibited a 8.1x, which was less than half that of the S&P 500 Index, shown at 19.2x.
• Price/Book Ratio: DGRS exhibited a 1.9x, less than half that of the S&P 500 Index at 5.7x.
• Price/Sales Ratio: DGRS exhibited a 1.0x, again, less than half that of the S&P 500 Index at 3.4x.

Figure 3: Priced for Very Different Potential Futures

If Leadership Turns, This May Be the Setup

We cannot know what future returns will bring, but valuation ratios help frame the expectations already embedded in prices. Lower multiples typically reflect more modest forward assumptions about growth and profitability. That also means the hurdle to exceed expectations is lower. If results simply stabilize or improve incrementally, share prices can respond meaningfully. Higher valuations, by contrast, signal elevated expectations and a narrower margin for error. Strong performance must persist merely to justify today’s pricing.

DGRS sits on the lower end of that spectrum. Its discounted multiples suggest subdued expectations, while early 2026 performance hints, cautiously, at improving momentum. That combination does not guarantee a shift in leadership, but it does create a different risk-reward profile. After a prolonged stretch of small-cap underperformance, the setup itself may warrant closer attention.

¹ Sources: Barron’s (December 10, 2025), “Small-Cap Stocks May Be Ready to Outperform After Five Years of Lagging”; Schwab (2025), “Can Small Caps Bounce Back?”

² The longest common period refers to July 25, 2013, to February 12, 2026, the full period since inception for DGRS.

³ Source: OpenAI (November 30, 2022). Introducing ChatGPT.