History repeats: Small and mid earnings and multiples

Small and mid cap stocks underperformed big stocks from 2015 to 2025, as we documented here, here and here.

The underperformance didn't happen in a vacuum. There are two reasons for the underperformance:

Multiples

1. In 2010, small and mid stocks became unusually expensive relative to big stocks.

This chart shows the relative forward P/E ratios of three indexes from 1999 to today:

• mid caps / big stocks → S&P 400 / S&P 500 (blue)
• small caps / big stocks → S&P 600 / S&P 500 (red)
• small caps / mid caps → S&P 600 / S&P 400 (green)

Key observations

1. From 2000 to 2010, the forward P/Es of small and mid caps rose relative to big stocks:

• Small caps started at 0.7x and ended at 1.34x, almost a double
• Mid caps started at 0.74x and ended at 1.26x forward P/E of big stocks, a +70 percent tailwind

2. From 2010 to 2025, small and mid caps fell relative to big stocks:

• Small caps started at 1.34x and ended at 0.66x, falling by more than half
• Mid caps started at 1.26x and ended at 0.7x, almost halving

3. Today, small and mid caps are historically cheap vs big stocks

• Small caps at ~0.74x forward P/E of large caps
• Mid caps at ~0.79x

This is near multi-decade lows:

• comparable to late 1999–2000
• significantly cheaper than the pandemic panic

Earnings

P/E multiples only tell half the story. The second half of the story is earnings.

This chart shows forward earnings per share since 2009 for three indexes:

• S&P 600 (small caps, green) → ~500+
• S&P 400 (mid caps, blue) → ~425
• S&P 500 (large caps, red) → ~400

Key observations

1. Small and mid caps have delivered the strongest earnings growth

• Both have consistently outperformed in earnings growth, but not price.

2. COVID reset hit all equally—but recovery diverged

• Post-2020: small caps exploded higher fastest.
• Earnings cyclicality is much higher in small and mid.

3. Recent trend (2023–2026)

• Earnings initially fell for small and mids, while big stocks leapt higher
• Small and mid-caps are now re-accelerating after a pause

Implications

Small and mid cap underperformance is NOT due to weak earnings.

• Earnings growth: Small > Mid > Large
• But price performance: Large > Mid > Small (last few years)

The gap is multiple distortion.

Market is paying a premium for perceived safety / duration (mega caps) and ignoring actual earnings growth + cash flow in smalls and mics.

This is a 2000-style setup. Valuation dispersion is extreme. Like 2000:

• large cap growth is expensive.
• small/mid cheap despite solid fundamentals

This is what led to the multi-year small and mid cap outperformance from 2000 to 2015.

Small and mid caps are growing earnings faster than large caps, but trading at massive discounts. This is a classic setup for a regime shift in relative performance.