Given the significant volatility over the previous 12 months in overall market returns and style-based indices, we believe it is helpful to provide ongoing guidance related to the aggregate intrinsic value characteristics of popular indices in size and style allocations.
In the Russell 1000, the overall index reflects upside of -0.5% (when incorporating analyst forecasts through 2024). While this observation is close to the -1.5 standard deviation threshold of observations noted since October 1998, we believe that investors benefit from maintaining their target allocation in equities due to low yields offered in other asset classes and the natural hedge to inflation provided by equities. We also believe that this can serve as great motivation to migrate away from large-cap passive allocations towards an alternative approach rooted in forming portfolios on undervalued securities.
Russell 1000 Value stocks briefly offered more attractive upside in 2020 after the initial sell-off of value stocks at the end of Q1. This valuation gap has since reversed, and now Russell 1000 Growth stocks offer improved aggregate upside of 4.2% compared to -8.9% for Russell 1000 Value stocks.
In the Russell 2000, the overall index reflects aggregate upside of -14.9%, and Russell 2000 Value stocks offer a slight improvement in upside of -13.9% compared to the -15.4% level for their growth peers.
Our third chart compares Russell 1000 and Russell 2000 universes. Since 2003, we have observed a valuation gap in favor of large-cap stocks that has persisted through late 2019. While that valuation gap narrowed as small-cap stocks sold off more sharply as COVID concerns proliferated, the valuation gap between large-cap and small-cap stocks has since widened back to nearly 14.5% after the recent small-cap rally over the last several quarters.
Shifting our focus to the S&P 500, we observe that a cap-weighted portfolio of index constituents has offered higher upside compared to its equal-weighted alternative since 2003. This valuation gap also closed in early 2020 as small-cap stocks sold-off, but the valuation gap has since widened back to nearly 17.5% following the recent smaller cap rally.
Applied Finance Research: Russell 1000 & Russell 2000 constituents. Portfolios formed on Book-to-Price & Composite of Sales Growth / Share and EPS Growth, 9/30/98 to 3/31/21, point-in-time data with monthly rebalancing. Chart displays cap-weighted Intrinsic Value (Plus 3) % Upside.