The Russell 2000 index is on quite a run, hitting new all-time highs day after day. The Russell is the most widely followed small cap index. Comparing the Russell to the S&P 500 over the last 2 decades, we can see that small cap stocks have been in favor since the end of the tech bubble in 2000:
Even with the strong recent run though, small caps are relatively flat vs. their large cap peers over the last 2 years, a bit surprising to me given the strength in the U.S. markets relative to the rest of the world in that period. Small cap stocks are generally purely domestic companies, while the large cap index has many names (like KO which reported this morning) that get a large portion or even a majority of their sales outside of the U.S.
I was curious how the Russell 2000 index stacked up vs. the S&P 500 on a valuation basis over the more recent past. One of my favorite measures of index valuation is Price / EBITDA (Earnings before interest, tax, depreciation, and amortization), as it leaves less room for manipulation or large one-time shifts than pure EPS. On that basis, here is the 7 year chart of Price / EBITDA for the Russell 2000:
So the Russell 2000 has made a new valuation high (currently at 9x) on this metric on its recent run higher, but it is still below its highs from 2006 and 2007 (around 9.5x). In contrast, the S&P 500 valuation is currently (around 8.25) well above its previous bull-market highs (around 7.25x) on a Price / EBITDA basis:
In that sense, the protection that investors have sought in the large cap space (particularly the high dividend yields and stable earnings growth) might have made those stocks too expensive relative to the other stocks in the market. While the shift to small caps has been pronounced in the last month, I’m most interested to see whether the RTY / SPX ratio surpasses its 2011 high near 0.65.