Bank of America, Merrill Lynch's August small-cap strategy report, warns of high valuations across the small-cap universe but also notes that quality small-caps are now trading at their lowest valuations in more than 15 years.
Small-cap, high price
The small-cap universe currently trades at a forward P/E of 19x earnings, which is in the top quintile of valuations on a historical basis. BoA notes, this kind of excessive valuation usually leads to a period of poor performance.
Small-cap biotech stocks are now at their highest weight ever in the Russell 2000 and Russell 2000 Growth at 7.2% and 13.4%. The nonearners represent more than 14% of the core benchmark and even more so in growth (20%).
Due to excessive valuations and a high weighting of nonearners...
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