It seems the good people at Bank of America hold a different view to Dollar Bill’s recent small-cap cheerleading. According to charts and data just trotted out by BoA Global Research chief strategist Michael Hartnett, we’ve marched back to the dot-com peak on multiple metrics.
The price-to-book ratio has climbed to 5.3 - the dot-com high was 5.1- the forward price-to-earnings ratio is near record levels, 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 are again on the precipice of history and in danger of crashing back through that memory hole – but Dollar Bill is not quick to agree.
Start with tech: half the US S&P is made up of AI and other megacap companies - think giants such as Nvidia - which are not just surviving, but thriving. And they are punching out big earnings, unlike the vapourware hucksters of the Y2K era.
Howard Marks, the doyen of market sense and founder of one of the world’s largest distressed securities investors, Oaktree Capital Management, doesn’t think the Magnificent Seven are overvalued. He believes the problem lies elsewhere and points to the rest of the market, which has lost touch with profit and discipline.
Throw in Rick Rieder, the BlackRock bond lord, who says, “we’re in the best investing environment ever”. Reider points to record buybacks, mountains of idle cash waiting to be deployed, sturdier earnings and the possibility of 100+ basis points of rate easings still to come. For small caps, this is not just encouragement - it’s a lifeline.
Still sceptical? Marks recently revisited his bubble.com memo, which offered a seminal dot-com warning that made him famous. He has now added a smart addendum: yes, we have froth, but not the mass hysteria that precedes true market blows.
If Wall Street’s big hat brigade can’t all agree the sky is falling, what about Down Under, particularly in the local small-cap land?
Top-ranked Australian boutique fund manager Maple-Brown Abbott is calling 2025 a “golden age” for Aussie small caps. Between better gold prices, reduced cost pressures and rising cash flows, they say our scrappy juniors are quietly shifting from laggards to leaders on the Small Ords. The gold miners alone are carrying more weight in the index.
Add to that the mechanics: during recent discussions with a few fellow members at the club over a single malt, some money managers reminded Dollar Bill that small stuff revives when rates fall. Morningstar’s research shows small caps are hypersensitive, both downside and upside, so rate easings are like flipping the switch on growth. And that’s where we are now.
A 2024 study by Furey Research Partners found that Australian small caps outperformed their large cap peers by an average of 7.8 per cent in the 12 months following the start of previous easing interest rate cycles, a pattern that has held across four rate-cutting periods going back 25 years.
This all lines up with our local adviser reality. According to the latest published survey, 51 per cent of Australian advisers are bullish on smallies versus just 32 per cent on large caps, with 35 per cent planning to lift their allocations in the next six months. That’s not idle chatter - it’s real portfolios being tilted towards small caps.
Even larger boutiques such as Ophir Asset Management have data underlining the warming small cap sentiment. Their Opportunities Fund returned an eye-popping 39 per cent in FY25. Surely this is evidence that the recent small cap rally isn't just a selective highlights reel?
Notably, small caps aren’t overloaded with institutional momentum – it’s quite the opposite. Morningstar notes they’ve lagged big caps but offer more upside when markets broaden and faith returns. Forty per cent of small Aussie stocks are rated four or five stars versus just 30 per cent in the ASX100. This isn’t just price momentum; it suggests real value.
The investment community gets it. Active small cap managers are starting to outperform benchmarking indices, presenting further proof that discreet, select exposure pays when valuations realign.
And it’s not only the Aussie brigade feeling frisky. Across the Pacific, analysts at BNP Paribas say the forward price-to-earnings ratio of United States small caps is more than 30 per cent below their large cap cousins, with earnings expected to surge by 42 per cent in 2025. American Century has forecast 22 per cent EPS growth in small caps compared to 15 per cent for big ones.
A 2024 Bloomberg Intelligence analysis showed that during the past five Fed easing cycles, US small caps outperformed large caps by an average of 15.5 per cent over the subsequent 18 months, with most of those gains front-loaded in the first nine months.
LPL Financial recently called out the “compelling valuations” in small caps, noting the US Russell 2000 index has broken out of a two-year sideways slog. That’s significant, given the index of the US’s top 2000 listed stocks is regarded as the broadest measure of the health of America’s listed stock.
Benzinga - a Detroit-born financial media and tech outfit trusted by global brokerages, fintech apps and millions of retail traders worldwide - reckons we could see a 30 per cent move if this rotation holds.
Then there’s global asset manager Janus Henderson, which oversees about $500 billion in assets and has never been known for frothy optimism. The firm described the recent lift in small caps as a “quiet awakening” following soft inflation prints and firm talk of federal rate cuts.
Over at JPMorgan, they’re pointing to AI capital investment, US deregulation and a possible manufacturing super-cycle as tailwinds for high-growth companies outside the S&P stratosphere. They’ve also made the point that small caps typically outperform in the first 12 months of a rate-cutting cycle – and we’re now there.
JPMorgan Asset Management’s July 2025 investor note found that in three of the past four US rate easing cycles, small cap equities produced total returns of between 28 per cent and 43 per cent in the first year after the first cut.
As for the idea that valuations are out of control… well, not according to the old-school Graham and Dodd crowd. For context, Graham and Dodd, both former professors at Columbia Business School, wrote the playbook on value investing in the wake of the 1929 crash – essential reading for all your kids. The Graham and Dodd pricing model – used to calculate intrinsic value – is still widely used and remains the cornerstone of all value pricing models. It calculates value based on earnings, growth potential and the financial strength of a company.
Sure, the Shiller CAPE might look stretched, but break it down by sector and small industrials, techs and energy names are still trading on metrics you’d call “attractive” in any other cycle. The reason? They’ve been forgotten in all the AI noise.
So, Dollar Bill is not a lone voice in the woods talking up small caps’ fortunes. There are some seriously credible heavyweights singing from the same song sheet, backed by numbers and stats.
And, don’t think the retail crowd isn’t noticing. Exchange-traded fund inflows into the US and Australian small cap indices have doubled quarter-on-quarter, while trading platforms such as CommSec report new account holders are disproportionately buying the small end of the ASX, not the megas.
Sometimes it pays to follow the smart kids in the cheap seats.
To top it all off, Goldman Sachs’ recent equity flows report showed net small cap inflows in the US reached a three-year high in Q2 2025, driven largely by institutional reallocations - a rare sign that big money is finally starting to get curious again.
While some on Wall Street may be producing a highlights reel flashing red, many others are firmly with Dollar Bill. Yes, the S&P just climbed Everest, but is the base camp crowd catching up?
Is Dollar Bill still bullish about small caps? You bet. Not because he’s blind to risk - far from it. But because the evidence, and the opinions of those with real street cred, say under the bonnet, the recovery is quiet, sustainable and inching dangerously close to respectability. Also, the overwhelming weight of statistics supports this.
Dollar Bill has noticed a few of the old guard at the club starting to shift their allocations. When they move early, it pays to pay attention.
Bank of America may have written its cautionary memo, but Dollar Bill is already building the case for the next act. Yes, some charts may be flashing amber, and the bank’s brigade has dusted off their dot-com manuals, but Dollar Bill isn’t spooked.
The air may be getting a little thin at the top of the market, it still feels like a mighty good time for a climb down in the small cap foothills.
Is your ASX-listed company doing something interesting? Contact: matt.birney@businessnews.com.au
