The Russell 2000 (IWM) is trading for 49x earnings compared with a multiple of 39x at the height of the Internet bubble. The S&P 500 P/E ratio of 17.2x is within spitting distance of its 75-year average.
The small cap gauge has returned an average of 30% per year since the March 2009 bottom vs. 25% for the S&P 500, but profits lately are not keeping up. In the last quarter, Russell 2000 profits climbed 6.8% vs. 8.6% for the S&P 500, and while S&P companies exceeded analyst estimates by 4.6%, Russell 2000 companies missed by 13%, according to Bloomberg.
"Monetary policy action cannot be taken off the table as a response to the build-up of broad and sustained systemic risk," said Fed Governor Daniel Tarullo recently, sighting bubbly small caps as one thing being eyed at the central bank.
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