https://www.youtube.com/watch?v=Y65in5BGpJA
Dan Rasmussen, the founder and portfolio manager of Verdad Advisers, explains why small companies have beaten large ones over the past year after losing to them since 2007, and why he does not read it as the start of a normal recovery trade. Before the interview, Miriam Gottfried and guest co-host Aaron Back preview the jobs and inflation numbers, work through Nvidia's blowout quarter and the financing it now extends to its own customers, and set up Broadcom's earnings.
👤 Guest: Dan Rasmussen, founder and portfolio manager at Verdad Advisers
🎙️ Host: Miriam Gottfried, investing reporter at The Wall Street Journal
👥 Also on: Aaron Back, Heard on the Street editor at The Wall Street Journal
📰 Published: 30 August 2026
🔴 YouTube | 🟢 Spotify | 🟣 Apple Podcasts | 🔗 Show notes | ⏱️ 29 min | ✅ Time saved: 11 min
Key Takeaways
Private equity's exit problem is the price it paid, not a closed IPO window
The public small-cap market is at one of its best moments in years, so the standard explanation cannot be right
Rasmussen's own numbers: the Russell 3000 at about 12 times EBITDA, the small-cap index around 10, and private equity's existing portfolio around 17
Private markets were "massively overcapitalized" relative to public markets, and the bill is arriving as unsellable inventory
The small-cap rally is the loss-making half of the index, not a broad recovery
He splits the universe into a private-equity half — profitable, cash generative — and a venture-capital half of biotech and speculative technology
The venture half has led by a wide margin, on AI-adjacent semiconductors and a biotech turn
Small stocks move on tiny flows, which is why the AI trade shows up harder down there
A name with a few million dollars of daily volume can be pushed up by one buyer writing a $20 million ticket
Moving Nvidia the same distance takes an amount of money nobody can quietly deploy
Credit spreads say this is the opposite of the trade that works
High-yield spreads are his best macroeconomic barometer, and they are near all-time lows, under 300 basis points
Small caps do extraordinarily well out of crises, when spreads are wide; when spreads are this tight, forward returns historically are not good
He is playing it as a trend, not as a valuation call
"Investing is not a game of analysis. It's a game of meta analysis" — what matters is your view against everyone else's
Buying consensus pessimism earns a premium; buying consensus excitement does not
The S&P 600 is the better small-cap index to hold, even after a year it lagged
Its profitability filter strips out the junk half that AQR's research says has terrible long-run returns
The Russell 2000 is split almost evenly between the two, which is why it won the last twelve months
A hedge fund manager who tells you to own the whole market
He calls himself "a huge Boglehead" and says market-cap weighting means 65% U.S. and 35% international
His complaint about passive is that the flows go to one index, the S&P 500, and starve small caps, mid caps and non-U.S. stocks
Value never stopped paying, it just lost to growth
U.S. value returns have been fine in absolute terms; the anomaly is how well the largest growth companies did
For AI to be sustainably profitable it has to pay customers more than producers, and it has not reached that point
Nvidia has become a lender to its own customers
Aaron Back on the circular financing: equity stakes in chip buyers like CoreWeave, plus a guarantee "worth over a hundred billion dollars" behind an OpenAI data-center lease
Chip demand from AI developers is not final demand — somebody has to pay for the services in the end
The jobs report and the CPI a week later decide the September meeting
Back said this is the most closely watched jobs report he can remember in a long time
Two soft prints and the market concludes "a September rate hike is off the table"; a hot CPI against weak jobs leaves Kevin Warsh in a tight spot
This Jobs Report Is the Most Closely Watched One Back Can Remember
Miriam Gottfried opened without her usual co-host: Telis Demos was on vacation, and his boss, Heard on the Street editor Aaron Back, took the chair. The week ahead starts with payrolls, and Back said the last one had been weak, with a large downward revision to the two months before it.
"This Jobs Report is going to be the most closely watched one that I can remember in a long time, to be honest." — Aaron Back
Nobody was sure what to make of the last one. He cautioned against reading too much into a single print: "You never want to overreact to one report." The explanations offered at the time were seasonal-adjustment problems around back-to-school, and summer distortions in the data generally
The CPI report a week later is the other half of the test. Back said the two together will be decisive for where the market goes from here
If both come in soft, "I think the market's going to conclude that a September rate hike is off the table." If both come in hot, people start betting on one again
The awkward case is the split. Last week's PCE reading — an alternative inflation measure — was, in his words, a little too strong for comfort. If that shows up in CPI while the jobs numbers stay weak, "then Kevin Warsh is in a really tight spot."
Nvidia Finally Rallied on Earnings, and the Financing It Now Extends Is the New Worry
The stock had fallen after each of the last several reports because expectations were so high. This time it rose. "They said that their revenue next fiscal year is going to grow 70%," Back said, and the company added that growth would be faster still without supply-chain constraints. Memory pairs with Nvidia's chips in the systems it sells, memory prices are climbing, and margins will fall as a result.
The rally spread to other chip names. Back's reservations are all about what happens after that.
The spending itself may not be repeatable. Microsoft, Google and Meta are already tapping the debt markets to fund it, and he said he does not know how much longer that can go on
The circular financing is the second concern. Nvidia holds equity in companies that buy its chips, such as CoreWeave, and has been writing financial guarantees "Recently, it issued a guarantee worth over a hundred billion dollars for a data center lease by OpenAI, and this data center is going to buy Nvidia chips." "So basically it is financing its customers and these customers are in turn buying its chips." The risk he named is asymmetric: "if there's ever a slowdown in this space, the risk is that Nvidia could kind of get hit twice"
The question underneath all of it is who the final customer is. "If the people demanding the chips are really just the AI developers who are developing AI, Anthropic, OpenAI, who are building more and bigger models, that's not final demand." Someone eventually has to pay for the services
Gottfried brought her own beat to it. The wealth managers she covers are all spending heavily to implement AI, and "they haven't really been able to provide me with a lot of numbers to show how that's resulting in productivity gains." How it moves assets under management, or makes advisers more productive, has to be quantified before the spending continues
Back's version of the same doubt is about who signs off: if corporate buyers do not see a return, their shareholders may not let them keep spending
Broadcom Sells Off on Good Earnings Too, and This Week Tests Whether the Streak Holds
The other big chip report of the week is Broadcom, which Back described as a major AI chip maker that competes with Nvidia without the household name, and which also makes radio communication chips for Apple.
The same pattern has been running there: "they recently have been selling off every time they report earnings, even though the underlying earnings look extremely strong" — Aaron Back, with Gottfried finishing the thought, so much expectation built in
Part of the discount is mix. Broadcom's software business is not growing as fast and is less exciting to the market
After Nvidia's quarter, he said, the report should draw more attention than usual as a test of whether the chip makers can keep the streak going
The Internet Removed the Ceiling on How Big a Big Company Could Get
Before the interview, Gottfried set the definitions for listeners: "We're defining them as U.S. companies ranked 1,001 to 3,000 by market cap, and we're defining large caps as the top 500 companies by market cap." She also read the show's disclosure — "Verdad is long $900,000 of Nvidia and short $90,000 of Moderna as of last week."
Her first question was the long one: small caps beat large caps from 1926 to 2007, then lost from 2007 to 2024. What changed?
Rasmussen's answer is that the arithmetic of growth inverted. The prototypical small cap of the 1940s or 1950s was a restaurant chain with 20 restaurants and an obvious path to 1,000; the thousand-restaurant chain was already mature and grew slowly from there. The internet took the lid off the top end.
"That sort of top end constraint to growth turned out to not be there when it came to the internet."
The second effect ran the other way: small companies did not have the growth potential of scale competitors with better internet products and a global customer base
The market's oldest rule of thumb inverted with it. The largest 10 companies in the S&P 500 used to be the worst performers, because expectations had run ahead of results "But recently those top 10 companies have been the drivers of outperformance year after year, which is really historically anomalous."
Gottfried put it to him that AI has turbocharged the same dynamic, with giant companies growing massively. He agreed, and said the largest technology companies have grown beyond anything large caps have managed before
The Rally Is Coming From the Loss-Making Half of the Small-Cap Market
Gottfried's own figure for the turn: "I looked at the numbers this morning and as of this recording, the Russell 2000 is up 28% over the past 12 months."
Rasmussen's answer is that the index is two different markets wearing one name.
"You could almost think of one half as sort of the private equity half, profitable cash flow generative, and then the other half is the venture capital half." The second half is loss-making — disproportionately biotech and speculative technology, what some would call junk
The venture half has been leading, by a lot, and for two separate reasons "the speculative mania in anything touching AI and semiconductors in the small cap space has gone nuts" Biotech came out of a multi-year down cycle and finally showed signs of life, producing large outperformance over the same twelve months
On the mania itself he was careful to mark it as a description, not a verdict: "We're living through an era of speculative mania around AI." Whether it is justified, he said, is for smarter minds than his
Small Stocks Are Thin Enough That One Buyer Moves Them
The mechanism he keeps coming back to is liquidity. Small companies are thinly traded, so small flows travel a long way.
The comparison he drew is with the largest name in the market: the amount of money it would now take to push Nvidia stock up 30% is, in his words, a massive amount of inflows
"But you think of a small AI name that has maybe $5 million of traded volume a day and 500 million a market cap, that stock can get whipsawed up by just one new buyer coming in and putting $20 million into the name."
So as economic growth has accrued to data centers, power producers and semiconductor orders, the small, illiquid names moved further than the large ones on the same news — unsurprisingly, he said
Biotech's Recovery Is Real Science and Deal-Making, Not a Spillover From AI
Asked what is driving the bullish sentiment in biotech, Rasmussen told the story through Moderna.
During Covid, as the mRNA vaccines arrived, investors thought a new era of biotech discovery had begun and money flooded in at what he called crazy valuations
Then came the hangover: "So you had a sort of multi-year, three, four year drought where biotech had some of its worst performance ever in the history of the biotech index."
What has changed is not sentiment alone. He said the U.S. biotech industry remains vibrant and that real science has been produced, pointing to Moderna's latest discovery
He credits the flows to concrete events rather than to a narrative: large pharmaceutical companies buying to rebuild pipelines as their drugs go generic, and specific results such as the mRNA cancer treatment Moderna announced
It ran alongside the AI trade in time, he said, but he treats it as a different phenomenon with a different cause
Credit Spreads Under 300 Basis Points Say This Is Not the Post-Crisis Small-Cap Trade
Gottfried asked what the rally says about where we are in the economic cycle, given that small caps are usually the first thing to lead out of a downturn. Rasmussen said the usual signal is pointing the other way.
His research is on the relationship between high-yield credit spreads and small caps. Spreads measure what small, risky borrowers pay above Treasuries, and in his view they are the best macroeconomic barometer there is. They blow out in crises; when they are wide, forward returns to small caps are very high. As they normalize, financing improves, money flows back, the cycle rebounds, and — because small companies run at lower margins than large ones — a small change in revenue moves their earnings much more.
That trade exists, he has invested in it, and it is not what is happening now. "What we're seeing now is the opposite of that, which is that high yield credit spreads are near all time lows. They're under 300 basis points, which we've rarely ever seen."
Gottfried translated it for listeners — it is really cheap to get financing — and he agreed. Lenders are very willing to lend to small and risky borrowers, and have been for a while
What is left driving returns is sentiment: the venture-capital half of the Russell 2000, running on speculative optimism about AI and about biotech
The historical record is the caution. "when credit spreads are wide, small cap forward returns are very high. And when credit spreads are very tight as they are now, small cap forward returns are not all that good"
When optimism about this kind of trade has reached these levels before, he said, the reality has been more disappointing
Investing Is a Game of Meta-Analysis, So He Will Ride It and Try to Get Off in Time
Gottfried pushed on the practical problem: buying small caps into a crisis means catching a falling knife, and selling now on the basis that it looks risky means missing a lot of upside. How does he reason through it?
"I say that investing is not a game of analysis. It's a game of meta analysis." What matters is not your read of the situation but your read relative to what everyone else thinks
In a crisis, the consensus is the opportunity. If everyone is saying you are catching a falling knife, the instinct should be that these things must be very cheap. "And so for me as sort of an active manager taking active risk, I'm betting against sort of consensus pessimism." Stepping in when everyone else is terrified should, in theory, earn a premium
Today the trade is the reverse and the premium is not there. When everyone is more excited than usual — expecting high earnings growth, better-than-average medical discoveries, more semiconductor gains — he is not sure he gets paid in a differentiated way for joining in
"I'm going to own it while it's working and then I'm going to get off before the train wreck happens if there ever is one."
Private Equity Cannot Sell Because It Paid 17 Times EBITDA for Companies the Public Market Prices at 10
After the break, Gottfried turned to private equity — she has covered private markets at the Journal for eight years — and asked what a ripping public small-cap market says about what is sitting in private equity portfolios.
"Well, I think there's some irony, Miriam, in that the private equity firms are unable to sell their investments." Companies bought in the 2018 to 2023 era are stuck. The industry's explanation is a tough IPO window, and he does not accept it: this is one of the best public equity markets on record, U.S. valuations are near all-time highs, and the small-cap market is ripping.
"So the explanation that you can't sell because the IPO market has closed has just got to be wrong."
His own arithmetic for the gap: "according to my calculations, the Russell 3000 today trades at about 12 times EBITDA and the small cap index probably trades at around 10 times EBITDA" Against that, "the inventory of private equity that's today on the books of the private equity firms probably trades at around 17 times EBITDA"
The conclusion he draws is about price, not about the exit market: the firms paid far too much, and nobody wants to pay those prices now
Why they could pay them: "everybody believed that private equity was the best investment since sliced bread and massively overcapitalized the private markets relative to public markets"
The S&P 600's Profitability Filter Is the Better Small-Cap Index to Hold
Asked about the long-running criticism of the Russell 2000's construction, Rasmussen went back to the two-market framing and to research from Cliff Asness's firm.
"AQR has argued for many years that profitable small cap segment has really excellent returns and the unprofitable junk segment has terrible returns." So an index product that tilts toward profitable firms should do much better
One exists. The Russell 2000 is almost perfectly balanced across the junk and the profitable halves; the S&P 600 applies a profitability filter that eliminates a lot of the unprofitable names
"So I think as a buy and hold investor, I love that S&P 600 small cap index." He called it a much better index for long-term buy and hold
The last twelve months went the other way, because the unprofitable names rallied and the Russell 2000 carries them. Gottfried put it to him that an S&P 600 holder would have missed that His answer was that the small-cap index has done well regardless, but that the exposure to the more speculative segments is not there
A Hedge Fund Manager Who Wants You to Own the Whole Market
Gottfried asked the question most listeners actually face: an S&P 500 index fund, or a total-market fund like Vanguard's.
"So the S&P 500 is essentially the 80 or 85% largest stocks in the market." The total market index adds the small and mid caps left out — a share he declined to pin down precisely. The gains of recent years have been concentrated in the biggest stocks, and in theory an efficient market should not let that continue forever.
The valuation gap is his reason for preferring the broader fund. Small caps trade at a significant discount to large caps, and that discount has been widening There is no case, he said, for cutting off your exposure at an arbitrary size or number of stocks when the smaller stocks have done well over the long term
He is unembarrassed about index funds. "I love index funds. I'm a huge Boglehead." Gottfried: "You don't hear a hedge fund manager say that very often." He said he is an empiricist and the performance numbers are hard to argue with
His objection is to what passive means in practice. When people hear passive, they buy the S&P 500 — so the flows go disproportionately to one index, to the neglect of small caps, mid caps and international stocks, and most people do not realize passive is itself heavily U.S.
Whether those flows are the cause of U.S. large-cap outperformance he would not say; the causality, he said, is hard to piece together
"my view is that your starting point should be that the efficient-markets hypothesis is roughly right and therefore you should be market cap weighted, which means 65% U.S., 35% international and owning the total market, not just the largest cap indices"
Value Did Not Stop Working, Growth Just Won
Gottfried finished on value: buying lower multiples of earnings determined outperformance for years and then stopped, the same way small caps did. Are the causes the same?
He separates the U.S. from international markets. In the U.S., he said, the returns to owning value stocks have been fine — they have only been worse in relative terms, because growth did so well. The anomaly is the innovation period itself, in which an entirely new industry appears to be owned by the largest growth companies, and that is where the value has accrued.
His test for whether that lasts is who captures the surplus: "for technologies to be sustainably profitable, they need to be more profitable to the customers than they are to the producers" The economics have to work that way, he said, or customers stop buying the product
"And so I think at some point, the beneficiaries of AI, the customers of AI should benefit more than the producers of it, but we haven't obviously reached that point in the adoption curve."
Rasmussen's bottom line is that the small-cap rally is a liquidity-driven repricing of the market's most speculative half at a moment when credit spreads say forward returns should be poor — so he will own it as a trend rather than as a value call, and the same overpayment that is now trapping private equity's portfolio is the thing public small-cap buyers should be careful not to repeat.
Products, Companies & Tools Mentioned
Verdad Advisers (Rasmussen's firm; the show disclosed that it is long Nvidia and short Moderna)
Nvidia (Came up twice — as the blowout quarter that finally moved the stock up, guiding to 70% revenue growth next fiscal year, and as the lender writing guarantees behind its own customers' data centers)
Broadcom (The week's other chip report; a major AI chip maker that competes with Nvidia, makes radio communication chips for Apple, and keeps selling off on strong earnings)
Moderna (The stock the show disclosed a short in, and Rasmussen's illustration of biotech's boom, bust and recovery, most recently on an mRNA cancer treatment)
OpenAI and CoreWeave (The two named ends of Nvidia's circular financing: an equity stake in a chip buyer, and a guarantee behind an OpenAI data-center lease)
Microsoft, Google and Meta (The big internet spenders now going into the debt markets to fund AI capital spending)
Anthropic (Named with OpenAI as an AI developer whose chip demand is not final demand)
Apple (The customer for Broadcom's radio communication chips)
Russell 2000 and Russell 3000 (The small-cap index split evenly between profitable companies and loss-making ones, and the broader index he prices at about 12 times EBITDA)
S&P 600 (The small-cap index with a profitability filter; his preference for long-term buy and hold)
S&P 500 and the Vanguard Total Market Index (The two funds most listeners actually hold; he prefers the broader one and says the flows all go to the narrower)
AQR (Cliff Asness's firm, whose research on profitable versus junk small caps underpins his index preference)
Federal Reserve (The September meeting the jobs and CPI reports feed into, under Chair Kevin Warsh)
Books & Resources Mentioned
Inflation Was 3.4% in July, Down Slightly From the Previous Month (Journal coverage of the last CPI print the hosts weigh against this week's)
Fed's Preferred Inflation Gauge Remains Above Target Range (The PCE reading Back called a little too strong for comfort)
Nvidia Reports Blowout Quarter, Says Demand for AI Chips Is Getting Even Hotter (The earnings report that opened the show)
Nvidia's $279 Billion Supply-Chain Gamble (Background on the supply constraints and memory costs Back said will pull margins down)
Nvidia Has Become a Banker to the AI Boom, Putting It on Dangerous Ground (The Journal's reporting on the circular financing discussed in the first segment)
Private-Equity Firms Are Sitting on a Nine-Year Backlog (The exit logjam Rasmussen attributes to the prices paid rather than to the IPO window)
A Better Mousetrap for Buying Small Stocks (The Journal's piece on small-cap index construction, the subject of the S&P 600 exchange)
Moderna Shares More Than Double on Success of mRNA Cancer Vaccine (The discovery behind the biotech turn he described)
Get the latest market chatter as it happens: