Markets spent much of the past year transfixed by a narrow set of mega-cap narratives, but John W. Rogers, Jr. argues that something more interesting is happening beneath the surface.
In the Quarterly letter – The Patient Investor Q3 2025, Rogers frames the third quarter as a moment when leadership quietly broadened and small caps began to reassert themselves after a long stretch of neglect. While large growth stocks continued to dominate headlines, the data told a different story for investors willing to look elsewhere.
The shift became visible when “the Russell 2000 Index quietly closed at a new all-time high for the first time since 2021.”
That milestone mattered less for its symbolism than for what it revealed about underlying momentum. Small-cap value outperformed all other asset classes during the quarter, supported by easing financial conditions and an earnings backdrop that is finally improving.
With a meaningful share of small-cap debt tied to short-term or floating rates, the Federal Reserve’s September rate cut added tangible fuel to the move, reducing refinancing pressure and improving cash flow prospects.
Rogers emphasizes that valuation dispersion has become extreme. He notes that performance divergence has left smaller companies historically cheap, with internal estimates showing a wide gap between small-cap value and the broader Russell 2000.
That disconnect is precisely where opportunity tends to emerge, especially when investor attention remains elsewhere. As he puts it, “When stadium-sized crowds gather around a handful of giants, the opportunity set in smaller companies often improves as prices disconnect from fundamentals.”
Earnings trends are reinforcing that message. After more than a year of downgrades, small-cap estimates have turned decisively higher. According to data cited in the letter, “collective earnings from the benchmark’s 2,000 constituents [Russell 2000 Index], meanwhile, are forecast to grow by more than 50% on average over the next four quarters, nearly five times the pace of S&P 500 profits.”
That reversal matters because earnings recovery, not just multiple expansion, is what sustains longer-lasting leadership shifts.
The letter also underscores that this is not a call to chase momentum but to revisit fundamentals. Portfolio holdings are positioned with higher credit quality and stronger interest coverage ratios than benchmarks, which should amplify the benefits of lower rates.
Rogers frames this as a familiar pattern rather than a novelty: periods of narrow enthusiasm often sow the seeds for broader participation later on.
Taken together, the message in the Quarterly letter – The Patient Investor Q3 2025 is clear. As leadership widens and fundamentals improve, small-cap value is no longer merely a contrarian idea but an area where valuation, earnings, and macro conditions are beginning to align.
You can read the entire letter here:
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