Dot-com deja vu or small-cap revival? | Australian Markets

It appears the nice people at Bank of America maintain a totally different view to Dollar Bill’s current small-cap cheerleading. According to charts and knowledge simply trotted out by BoA Global Research chief strategist Michael Hartnett, we’ve marched back to the dot-com peak on a number of metrics.

The price-to-book ratio has climbed to five.3 – the dot-com high was 5.1- the ahead price-to-earnings ratio is close to document ranges, and the Shiller CAPE metric – which calculates the cyclically adjusted price-to-earnings ratio – is flirting with territory that preceded collapses in 1929, 2000 and 2021.

If the charts are to be believed, we’re again on the precipice of historical past and in peril of crashing back by way of that reminiscence gap – however Dollar Bill isn’t fast to agree.

Start with tech: half the US S&P is made up of AI and different megacap firms – suppose giants resembling Nvidia – which aren’t simply surviving, however thriving. And they’re punching out large earnings, in contrast to the vapourware hucksters of the Y2K period.

Howard Marks, the doyen of market sense and founder of one of the world’s largest distressed securities buyers, Oaktree Capital Management, doesn’t suppose the Magnificent Seven are overvalued. He believes the issue lies elsewhere and factors to the remainder of the market, which has misplaced contact with revenue and self-discipline.

Throw in Rick Rieder, the BlackRock bond lord, who says, “we’re in the best investing environment ever”. Reider factors to document buybacks, mountains of idle money ready to be deployed, sturdier earnings and the chance of 100+ foundation factors of fee easings nonetheless to return. For small caps, this isn’t simply encouragement – it’s a lifeline.

Still sceptical? Marks not too long ago revisited his bubble.com memo, which provided a seminal dot-com warning that made him well-known. He has now added a sensible addendum: yes, we’ve froth, however not the mass hysteria that precedes true market blows.

If Wall Street’s large hat brigade can’t all agree the sky is falling, what about Down Under, notably within the native small-cap land?

Top-ranked Australian boutique fund supervisor Maple-Brown Abbott is looking 2025 a “golden age” for Aussie small caps. Between higher gold costs, decreased price pressures and rising money flows, they are saying our scrappy juniors are quietly shifting from laggards to leaders on the Small Ords. The gold miners alone are carrying more weight within the index.

Add to that the mechanics: during current discussions with a few fellow members on the membership over a single malt, some money managers reminded Dollar Bill that small stuff revives when charges fall. Morningstar’s analysis exhibits small caps are hypersensitive, each draw back and upside, so fee easings are like flipping the change on growth. And that’s the place we at the moment are.

A 2024 research by Furey Research Partners discovered that Australian small caps outperformed their giant cap friends by an average of 7.8 per cent within the 12 months following the beginning of earlier easing rate of interest cycles, a sample that has held throughout 4 rate-cutting intervals going back 25 years.

This all strains up with our native adviser actuality. According to the latest revealed survey, 51 per cent of Australian advisers are bullish on smallies versus simply 32 per cent on giant caps, with 35 per cent planning to raise their allocations within the subsequent six months. That’s not idle chatter – it’s actual portfolios being tilted in direction of small caps.

Even bigger boutiques resembling Ophir Asset Management have knowledge underlining the warming small cap sentiment. Their Opportunities Fund returned an eye-popping 39 per cent in FY25. Surely that is proof that the current small cap rally isn’t simply a selective highlights reel?

Notably, small caps aren’t overloaded with institutional momentum – it’s fairly the other. Morningstar notes they’ve lagged large caps however offer more upside when markets broaden and religion returns. Forty per cent of small Aussie stocks are rated 4 or 5 stars versus simply 30 per cent within the ASX100. This isn’t simply price momentum; it suggests actual worth.

The investment group will get it. Active small cap managers are beginning to outperform benchmarking indices, presenting additional proof that discreet, choose publicity pays when valuations realign.

And it’s not solely the Aussie brigade feeling frisky. Across the Pacific, analysts at BNP Paribas say the ahead price-to-earnings ratio of United States small caps is more than 30 per cent under their giant cap cousins, with earnings anticipated to surge by 42 per cent in 2025. American Century has forecast 22 per cent EPS growth in small caps in comparison with 15 per cent for large ones.

A 2024 Bloomberg Intelligence evaluation confirmed that during the previous 5 Fed easing cycles, US small caps outperformed giant caps by an average of 15.5 per cent over the next 18 months, with most of these features front-loaded within the first 9 months.

LPL Financial not too long ago known as out the “compelling valuations” in small caps, noting the US Russell 2000 index has damaged out of a two-year sideways slog. That’s important, given the index of the US’s high 2000 listed stocks is thought to be the broadest measure of the health of America’s listed stock.

Benzinga – a Detroit-born financial media and tech outfit trusted by world brokerages, fintech apps and tens of millions of retail merchants worldwide – reckons we may see a 30 per cent transfer if this rotation holds.

Then there’s world asset supervisor Janus Henderson, which oversees about $500 billion in belongings and has by no means been recognized for frothy optimism. The firm described the current raise in small caps as a “quiet awakening” following gentle inflation prints and firm discuss of federal fee cuts.

Over at JPMorgan, they’re pointing to AI capital investment, US deregulation and a potential manufacturing super-cycle as tailwinds for high-growth firms outdoors the S&P stratosphere. They’ve additionally made the purpose that small caps sometimes outperform within the first 12 months of a rate-cutting cycle – and we’re now there.

JPMorgan Asset Management’s July 2025 investor notice discovered that in three of the previous 4 US fee easing cycles, small cap equities produced complete returns of between 28 per cent and 43 per cent within the first yr after the primary cut.

As for the concept valuations are out of control… effectively, not in accordance with the old-school Graham and Dodd crowd. For context, Graham and Dodd, each former professors at Columbia Business School, wrote the playbook on worth investing within the wake of the 1929 crash – important studying for all of your youngsters. The Graham and Dodd pricing model – used to calculate intrinsic worth – continues to be broadly used and stays the cornerstone of all worth pricing fashions. It calculates worth primarily based on earnings, growth potential and the financial energy of a company.

Sure, the Shiller CAPE may look stretched, however break it down by sector and small industrials, techs and power names are nonetheless trading on metrics you’d call “attractive” in some other cycle. The purpose? They’ve been forgotten in all of the AI noise.

So, Dollar Bill isn’t a lone voice within the woods speaking up small caps’ fortunes. There are some significantly credible heavyweights singing from the identical tune sheet, backed by numbers and stats.

And, don’t suppose the retail crowd isn’t noticing. Exchange-traded fund inflows into the US and Australian small cap indices have doubled quarter-on-quarter, whereas trading platforms resembling CommSec report new account holders are disproportionately shopping for the small finish of the ASX, not the megas.

Sometimes it pays to observe the sensible youngsters within the low cost seats.

To high all of it off, Goldman Sachs’ current equity flows report confirmed web small cap inflows within the US reached a three-year high in Q2 2025, pushed largely by institutional reallocations – a uncommon signal that large money is lastly beginning to get curious again.

While some on Wall Street could also be producing a highlights reel flashing purple, many others are firmly with Dollar Bill. Yes, the S&P simply climbed Everest, however is the bottom camp crowd catching up?

Is Dollar Bill nonetheless bullish about small caps? You wager. Not as a result of he’s blind to risk – removed from it. But as a result of the proof, and the opinions of these with actual avenue cred, say below the bonnet, the restoration is quiet, sustainable and inching dangerously close to respectability. Also, the overwhelming weight of statistics helps this.

Dollar Bill has observed a few of the outdated guard on the membership beginning to shift their allocations. When they transfer early, it pays to concentrate.

Bank of America could have written its cautionary memo, however Dollar Bill is already building the case for the following act. Yes, some charts could also be flashing amber, and the bank’s brigade has dusted off their dot-com manuals, however Dollar Bill isn’t spooked.

The air could also be getting a little skinny on the high of the market, it nonetheless appears like a mighty good time for a climb down within the small cap foothills.

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