June 15, 2020
Despite recent volatility, the US equity market has continued to outperform most others. It’s important to point out, in our view, that much of this outperformance has been driven by large-caps, which outperformed small-caps by more than 16% over the past year. However, within recessionary periods, valuations often come back into focus.
As seen in the chart below, small-caps, which historically trade at higher valuations relative to large-caps, are currently trading at a deep relative discount. As of April 30, 2020, small-caps, as measured by the Russell 2000® Index, had a price-to-earnings (P/E) ratio of 17.1 versus 20.3 for large-caps, as measured by the Russell 1000® Index.
Small-caps trading at a deep relative discount
Note: P/E measures exclude negative earnings. Forward P/E is on I/B/E/S consensus next-12-months forecast earnings.
Sources: BofA Merrill Lynch US Equity & Quant Strategy, Russell Investment Group, I/B/E/S, and Compustat.
Time period is 20 years from April 30, 2000 to April 30, 2020.
Past performance does not guarantee future results.
What this means for investors
The search for investment growth remains a central, critical goal for today’s investors, but finding a reliable source at attractive valuations can be challenging. In addition to the relatively attractive valuations discussed, small‑caps’ estimated 3- to 5-year earnings per share (EPS) growth compares favorably to that of large-caps, at 13.5 versus 12.3, respectively. We believe there is an opportunity for small-caps to potentially provide that solution.
Unless otherwise noted, the source of the financial data is FactSet.