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According to the firm, U.S. small caps appear to be pricing in a greater degree of macro risk relative to their large-cap peers. The median forward P/E for the S&P 600 SmallCap index is 11.8x, while the S&P 500 stands at 17.0x, representing a significant discount.
Similar valuation disparities in the past, seen only twice since 1990 (TMT bubble and COVID-19), have resulted in substantial outperformance by small caps.
According to the firm, investors may find compelling opportunities in U.S. small caps, while the case for European small caps is less convincing based on relative valuations.
