Small-caps are at their cheapest relative valuations in last 20 years

Small-caps are at their cheapest relative valuations in last 20 years

As of February 28, 2022, small-cap equities – as measured by the Russell 2000® Index – are currently cheaper than any point in the last twenty years and are also at their lowest relative valuations versus large-cap securities (the Russell 1000® Index) for that period. In fact, all three of the Russell 2000 standard and style indices, the Russell 2000, 2000® Value, and 2000® Growth indices, are at valuation levels unseen in the last 20 years.

Russell 2000 Index vs. Russell 1000 Index

Russell 2000 Index vs. Russell 1000 Index

Chart source: FactSet, Bank of America US Equity and Quant Strategy. Data as of February 28, 2022.

What this means for investors

Valuations play an important factor in future returns, in our view. With largecaps trading at historical premiums and small-caps at historical discounts, we think now might be an appropriate time to consider small-cap equities.

The last time small-caps traded near these relative values was in February 2003. A look back at the relative returns over the subsequent 1-, 3-, and 5-year periods shows that small-caps meaningfully outperformed large-caps as measured by Russell 1000 and S&P 500.

Performance from February 28, 2003

Indices 1 year
annualized
3 year
annualized
5 year
annualized
Russell 2000 Index 64.41 28.05 15.10
Russell 2000 Value Index 63.98 29.16 15.35
Russell 2000 Growth Index 64.86 26.76 14.72
Russell 1000 Index 39.69 18.15 12.24
S&P 500® Index 38.52 17.11 11.64
*Price-to-earnings (P/E) ratios for the below charts are as follows: Russell 1000®: 19.17x Russell 2000: 14.48x Russell 2000® Value: 12.40x Russell 2000® Growth: 17.93x

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Investing involves risk, including the possible loss of principal.

Past performance does not guarantee future results.

Nothing presented should be construed as a recommendation to purchase or sell any security or follow any investment technique or strategy.

The views expressed represent the investment team’s assessment of the market environment as of March 2020, and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice. Views are subject to change without notice.

Market risk is the risk that all or a majority of the securities in a certain market – like the stock market or bond market – will decline in value because of factors such as adverse political or economic conditions, future expectations, investor confidence, or heavy institutional selling.

Charts shown throughout are for illustrative purposes only and not meant to predict actual results.

Chart is for illustrative purposes and is not representative of the performance of any specific investment.

The price-to-earnings ratio (P/E ratio) is a valuation ratio of a company’s current share price compared to its earnings per share. Generally, a high P/E ratio means that investors are anticipating higher growth in the future.

The price-to-book ratio (P/B ratio) compares a stock’s market value to its book value.

The Russell 1000 Index measures the performance of the large-cap segment of the US equity universe. The Russell 1000 Index is a subset of the Russell 3000 Index and includes approximately 1,000 of the largest securities based on a combination of their market capitalization and current index membership.

The Russell 2000 Growth Index measures the performance of the small-cap growth segment of the US equity universe. It includes those Russell 2000 companies with higher price-to-book ratios and higher forecasted growth values.

The Russell 2000 Value Index measures the performance of the small-cap value segment of the US equity universe. It includes those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values.

The Russell 2000 Index measures the performance of the small-cap segment of the US equity universe. The Russell 2000 Index is a subset of the Russell 3000® Index, representing approximately 10% of the total market capitalization of that index.

The S&P 500 Index measures the performance of 500 mostly large-cap stocks weighted by market value and is often used to represent performance of the US stock market.

Frank Russell Company (“Russell”) is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. Russell® is a trademark of Russell..

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