The Big PE10 At The Small End Of Town

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&P500.  Indeed the CAPE has historically been a good predictor of longer term forward equity market returns.

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But in this article we’ll take a look at the PE10 for the smaller end of town. Instead of the S&P500 we’ll examine the PE10 for the S&P600.

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.

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PE10

The PE10 as calculated for this graph is price divided by the past 10 years 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&P500 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.

For more on the analysis, click through to request a copy of the latest edition of the Weekly Macro Themes report in which this chart appeared.

This article originally appeared as a submission at See It Market

Article by Callum Thomas, Top Down Charts



About the Author

Top Down Charts
Topdown Charts: "chart driven macro insights" Based in Queenstown, New Zealand, Topdown Charts brings you independent research and analysis on global macro themes and trends. Topdown Charts covers multiple economies, markets, and asset classes with a distinct chart-driven focus. We are not bound by technical or fundamental dogma, and instead look to leverage any relevant factor to capture the theme. As such, here you will find some posts that are purely technical strategy, some that just cover economics and data, and some posts that use multiple inputs to tell the story and identify the opportunities. Callum Thomas Head of Research Callum is the founder of Topdown Charts. He previously worked in investment strategy and asset allocation at AMP Capital in the Multi-Asset division. Callum has a passion for global macro investing and has developed strong research and analytical expertise across economies and asset classes. Callum's approach is to utilise a blend of factors to inform the macro view.