‘Uncomfortable’ with S&P 500 valuations? Investors may still find ‘bargains’ in small-cap stocks, says RBC

Investors who have become “uncomfortable” with the S&P 500’s valuations after the U.S. stock market’s rally this summer can still find “bargains” in small-cap equities, according to RBC Capital Markets.

“Valuations are elevated, but not extreme, for the S&P 500 again,” said Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets, in a note Monday. “But small caps still look cheap.”


RBC CAPITAL MARKETS

The small-cap focused Russell 2000’s forward price-to-earnings ratio, or P/E, remains “a bit below” its long-term average, according to Calvasina. Her research shows the index had a P/E of 14.4 in mid-August.

“In December 2018 and March 2020, major bottoms in the stock market were achieved when this particular indicator briefly dipped below its long-term average,” she said. More recently, “its foray to the low end of its historical range helped the broader market establish” its mid-June low. 

The S&P 500
SPX,
-3.37%
closed at 3,666.77 on June 16, the lowest level for the U.S. large-cap stock benchmark in the past 52 weeks, according to Dow Jones Market Data. It finished Friday at 4,228.48, up 15.3% from that mid-June low but is still down 12.8% so far this year.

The small-cap-focused Russell 2000 index
RUT,
-3.30%
remains down more than 14% this year, after surging 12.7% so far in the third quarter, according to FactSet data, at last check. The U.S. large-cap index rose 9.8% since the end of June based on Monday’s trading levels.

U.S. stocks were down sharply in early afternoon trading Monday as investors reassessed the market’s summer rally. 

The Dow Jones Industrial Average
DJIA,
-3.03%
was off 1.5%, while the S&P 500 dropped 1.7% and the technology-laden Nasdaq Composite
COMP,
-3.94%
slid around 2%, FactSet data show, at last check. The Russell 2000 had dropped 1.7% in early afternoon trading Monday.  

“Top S&P 500 valuations are above average but below recent major peaks, while small caps still look attractively valued,” said Calvasina. “Valuation pressures are not sufficient evidence to call an end to the summer rebound just yet.”

Hear from Carl Icahn at the Best New Ideas in Money Festival on Sept. 21 and Sept. 22 in New York. The legendary trader will reveal his view on this year’s wild market ride.

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https://www.marketwatch.com/story/uncomfortable-with-s-p-500-valuations-investors-may-still-find-bargains-in-small-cap-stocks-says-rbc-11661187624