Micro caps are their most expensive since the Tech Bubble: BofA

Investing.com -- Micro caps are now the most expensive part of the small-cap universe, now trading at their richest valuations since the Tech Bubble, according to Bank of America.

The Russell Microcap Index fell 4.5% last week, underperforming the Russell 2000 and Russell Top 200, both down 1.9%.

“Micro caps have grown to become the most expensive part of the index, now trading nearly 80% above history on price/sales and 22% above history on price/book,” BofA strategist Jill Carey Hall said.

By comparison, the largest size quintile trades 8% below and 25% below history on those respective metrics.

Hall highlighted that micro caps are now “their most expensive vs. the index since the Tech Bubble.” BofA’s client flow data shows they have seen outflows most weeks since early October, even as broader small-cap funds experienced inflows.

Overall, small-cap valuations were little changed last month, with the Russell 2000’s forward price-to-earnings (P/E) steady at 16.1 times, about 6% above its long-term average.

The relative P/E of the Russell 2000 versus the Russell 1000 slipped to 0.71 times, roughly 30% below its historical average, suggesting small caps remain cheap versus large caps. BofA’s long-term regression implies annualized returns of around 8% for small caps over the next decade, compared with 0% for large caps.

Hall said around three-quarters of the Russell 2000’s 11% year-to-date return has been driven by upward earnings revisions. Small-cap earnings are expected to accelerate through 2026, with S&P 600 consensus growth of 19% that year, ahead of mid- and large-cap peers.

Within sectors, Financials continued to rank best in BofA’s small- and mid-cap quantitative models, supported by stronger revisions and favorable valuations.

Tech and Utilities also scored highly, while Communication Services screened as the weakest sector and a “value trap.”