So-called small-cap value stocks have almost never been
Investors worried about the risks of a dot-com-style crash for Big Tech stocks in 2026 could usefully look twice, or even thrice, at the idea of adding some small-cap value stocks to their portfolio as well.
This is based on less of a prediction than a simple observation. So-called small-cap value stocks – meaning the stocks of smallish U.S. companies that are cheap in relation to present earnings, sales, dividends and net assets – have almost never been this cheap compared to their bigger, more fashionable and more expensive high-growth rivals.
The chart below tracks the price of small-cap value stocks in the S&P Small Cap 600 index SML (as tracked, for example, by the Vanguard Small-Cap Value ETF VBR) compared to S&P 500 SPX large-cap growth stocks (as tracked, for example, by the Vanguard Growth ETF VUG) going back to the late 1990s. As you can see, the ratio is now back at where it was in 1999-2000 – at the peak of the dot-com mania.
A FactSet analysis finds that among the stocks in the S&P 500 large-cap growth index, the median stock is priced at a lofty 26-times forecast earnings.
In the small-company value index, that figure is 12.5 times – less than half as much.
If you’re looking for signs of dangerous euphoria across the markets, they are easy to find. “We believe current equity valuations have become broadly untethered from fundamentals,” warn managers James Hollier and James Kovacs at investment firm Silver Beech.
For dot-com-style madness, Jeffrey Bronchick, manager of investment firm Cove Street Capital, points to reinvented bitcoin play Strategy (MSTR) – now, alas, down about two-thirds from its peak.
“Strategy Inc. was/is a masterclass for all-time in so many things that one can say are wrong with the world,” he writes.
Stock prices are set by the actions of buyers and sellers, which means that the more popular a stock or a group of stocks becomes among investors, the more expensive it will become – regardless of whether or not its fundamentals are improving or getting worse. This is why going against the crowd, or conventional wisdom, frequently offers opportunities.
Nobody knows for sure when or where the current mania for large growth stocks, especially in technology or artificial intelligence, is going to end. But there is no serious dispute about its scale or how far it has unbalanced the markets. The eight stocks that everyone is talking about – Nvidia (NVDA), Apple (AAPL), Microsoft (MSFT), Alphabet (GOOGL), Broadcom (AVGO), Meta (META), Tesla (TSLA) and Amazon (AMZN) – are now so highly valued that they account for 35% of the entire S&P 500. Which means that if you invest $1,000 in the S&P 500, expecting that your money will be diversified across 500 different big U.S. companies, $347 of your money goes into just those eight stocks.
The median stock trades about 28-times forecast earnings. Tesla, with a market value of $1.5 trillion, trades at 210-times forecast earnings.
Memories of the dot-com bubble have been badly distorted by time. The companies with the highest valuations, then as now, were “real” companies with earnings, sales and business models. The wacky and crazy stuff made great anecdotes, but it didn’t dominate the indexes any more than Strategy does now.
One thing people have forgotten is that the smart move during the dot-com bubble wasn’t to get out of stocks altogether, but to switch out of the fashionable stuff and instead pick up historic bargains among small-cap value stocks. In 2000, as the bubble burst, large-cap growth stocks fell by 22%. During the same year, small value stocks earned you 22%, including dividends. In 2001, large-cap growth fell another 13%; small-cap value rose by 14%.
Could this happen again? Many stranger things have happened. What’s old could become new again.
-Brett Arends
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