Small Cap Troubles?

One of the recent bright spots in the market recently has been small-cap stocks. The benchmark Russell 2000 index is up 13 percent since June, a return that’s better than the mark put up by either the Dow Jones Industrial Average or the S&P 500. But will it last?

With earnings running so high lately, the market as a whole is still fairly low-priced according to historic norms. But small-cap stocks are less of a bargain than larger ones. According to data compiled by S&P Capital IQ, the S&P 500 collectively is trading at a price-to-earnings ratio of about 14, as opposed to a historical median of 18.2 since 1995, a difference of about 30 percent. The S&P 600, though, has a P/E of 19.9 as opposed to a historical median P/E over that same time frame of 21.4. For the small-cap index, then, the current difference is just 7.5 percent. 

What that means is that small-cap stocks are much closer to their historic valuations than larger stocks. It doesn't necessarily mean large caps will show more growth in the near future, but it is a point in the big stocks' favor.