Small Cap Premium Spikes To 12%

Using non-normalized trailing operating earnings, Small Caps are selling at a 12% valuation premium to Large Caps (chart). Finally, our Ratio of Ratios has broken out of its range. The recent run up in Small Cap stocks, coupled with a less rosy (though still fantastic) trailing earnings profile, has given us the largest Small Cap premium we’ve seen in three years. However, looking at full-year 2018 earnings (table), Small Caps hold only a modest 5% valuation premium.

The S&P 500 outperformed in July—bunching YTD returns among the various market cap indexes closer together. Since 2015, returns are very uniform: S&P 500 +47%, S&P 400 +44%, Russell 2000 +46%.