September 23, 2019
With unemployment and interest rates low, and consumer confidence levels high, the US equity market has continued to outperform most others. It’s important to point out that much of this outperformance has been driven by large-caps, which outperformed small-caps by more than 15% over the past year. However, with concerns of a recession looming, 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 August 31, 2019, small-caps, as measured by the Russell 2000® Index, had a price-to-earnings (P/E) ratio of 15.1 versus 17.0 for large-caps, as measured by the Russell 1000® Index – a 19% discount to its 10-year relative average.
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 10 years
from August 2009 to August 2019.
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 above, small-caps’ estimated 3-5 year earnings per share (EPS) growth compares favorably to that of large-caps, at 16.7 versus 13.3, 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.