🐂 Not all bull runs are created equal. November’s AI picks include 5 stocks up +20% eachUnlock Stocks

Big PE10 For Small Caps Signals Lower Future Returns

Published 06/27/2017, 06:27 AM
Updated 07/09/2023, 06:31 AM
US500
-
SP600
-

A number of analysts and commentators have been discussing the increasingly high levels of the "Shiller PE", also known as CAPE or PE10, for the S&P 500. Indeed the CAPE has historically been a good predictor of longer-term forward equity market returns.

But in this article we'll take a look at the PE10 for the smaller end of town. Instead of the S&P 500, we'll examine the PE10 for the S&P 600.

The chart comes from a broader discussion on the outlook for US Small Cap Stocks in the latest edition of the Weekly Macro Themes report.

The chart shows the PE10 for small caps vs large caps, and there is a considerable gap between them, with small caps trading around a record high valuation level.

P/E S&P 600 vs S&P 100 1983-2017

The PE10 as calculated for this graph is price divided by the past 10 years of earnings (using historical price and earnings data from Thomson Reuters Datastream).

It is quite remarkable how far small cap stocks have run on a PE10 basis, both relative to large caps, and relative to history. They only previously approached these levels just prior to the financial crisis, and just before the 2015/16 market turmoil. They were left behind during the dot-com boom, but that's an extreme and different story.

In any case, at least for the S&P 500, several studies have shown that the higher the PE10, all else equal, the lower the future longer-term expected returns. Given that small caps are trading at a higher P10 than usual and higher vs large caps it would be reasonable to expect worse longer-term future performance in absolute and relative terms.

Latest comments

Loading next article…
Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.