Oil Price Shocks Are Testing Resilience Across Methodologies Among S&P SmallCap 600 Indices

Executive Summary

• The war and the subsequent surge in crude oil prices have amplified volatility in U.S. equity markets, including the S&P SmallCap 600 Index. Analysis of small cap equities reveals varying degrees of resilience to recent market fluctuations.
• The AI-driven tools in S&P Global Market Intelligence’s Capital IQ Pro platform, along with Xpressfeed, Portfolio Analytics, and data from S&P Dow Jones Indices, help clients uncover insights into equity volatility.
• This article examines the extent to which elevated oil prices influence the distribution and density of the S&P SmallCap 600 index and a sample of small cap indices with diverse construction methodologies, using 10-year historical daily data. Also, it explores the sector-level dispersion of risk-adjusted returns between cyclical and defensive sectors within small caps as a potential consequence of these dynamics.

The war in the Middle East and the subsequent surge in oil prices have been key drivers of volatility across U.S equity segments as inflation expectations risk de-anchoring. The chart below illustrates the density and distribution of four S&P SmallCap 600 stock indices compared to oil price fluctuations since 2016. The oil price range exhibits more outliers on both ends compared to indices. On Friday, February 27 (black dot), the day before the first U.S-Israel strikes on Iran, the four S&P SmallCap 600 equity indices traded at decade highs, while West Texas Intermediate (WTI) oil price stood at $67.06—near recent lows. Then, the war began, pushing oil price higher settling at $99.56, in contrast to declining levels across the S&P SmallCap 600 indices two weeks into the conflict by Friday, March 13 (red dot). During this period, the average decline across the analyzed group was about 85 points, with variations observed on each index's specific profile. Historical data is available via Xpressfeed and other delivery mechanisms that investors can leverage to populate algorithms and models.

S&P SmallCap 600 Index & S&P SmallCap 600 Equal Weighted Index
Both indices experienced declines as the war continued, with the Equal Weighted version declining more than the group average and outpacing the market-cap weighted counterpart. Despite the pullback, both indices remain near long-term highs, even as oil tested $100 by March 13. Historically, the S&P SmallCap 600 Index has shown retests around the 1,300 and 950 levels over the past decade. The Equal Weighted version, which has yet to break above 2,000, displays moderate density near 1,600 and 1,000 since 2016.

S&P SmallCap 600 Value Index & S&P SmallCap 600 Growth Index
As oil price trended higher on the chart above, the Value and Growth categories demonstrated greater resilience to the downside during the initial 10 trading days of the war, remaining near their decade highs. The Value Index showed the highest resilience. The Growth Index's decline was also less than the group average, approaching 1,150. Both indices are characterized by limited historical stock dispersion in the last decade.

As noted below, small cap equities tend to be sensitive to spikes in oil prices as they increase input and logistics costs.

The climbing oil price is also impacting dispersion across the 11 sectors in the S&P SmallCap 600 index. In addition to S&P Dow Jones Indices performance monitoring, the chart below plots YTD figures, accessible via Capital IQ Pro’s Portfolio Analytics offered by S&P Global Market Intelligence. These tools can be combined with user-defined custom functions to allow for ad-hoc or scheduled batch reporting. By mid-March, Energy sector equities posted higher risk-adjusted returns while defensive sectors Utilities and Health Care hovered toward the lower end of the spectrum.