Research
Patience Powered by Fundamental Research
Over the past six months, equity markets have experienced a broad rally. As Q3 comes to a close, we believe it is critical to reassess the valuation landscape.
Despite their recent outperformance since Liberation Day, small cap equities continue to trade at attractive relative valuations versus large caps. Within the segment, we believe small value remains particularly compelling, with discounts widening further compared to small growth. Over the long term, valuation remains one of the main determinants of alpha generation.
Small-Cap Value and Mid-Cap Value Remain Cheap Relative to History and Style Peers
As of June 30, 2025
Small vs. large: cheap vs. history across metrics
Russell 2000 vs. Russell 1000 relative valuation vs. historical avg. (January 31, 1985 – June 30, 2025)
Small Caps and Value are Historically Cheap Relative to Large Caps and Growth
As of June 30, 2025
Small cap Growth is historically expensive vs. Value on five out of six metrics
Relative premium to the historical average multiple for Russell 2000 Growth vs. Russell 2000 Value
Valuation Impact over Short and Long Time Periods
As of May 31, 2025
Valuations have the highest explanatory power over long-term (ten-year) returns
R2 of relative forward P/E vs subsequent return spread over various time horizons (since 1985): Russell 2000 vs Russell 1000,
as of 5/31/2025
Source: BofA US Equity & Quant Strategy; FactSet as of 5/31/2025.
For more small caps observations click here.
The opinions expressed herein are those of Aristotle Capital Boston (Aristotle Boston) and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Aristotle Boston reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.
All investments carry a certain degree of risk, including the possible loss of principal. Investments are also subject to political, market, currency and regulatory risks or economic developments. International investments involve special risks that may in particular cause a loss in principal, including currency fluctuation, lower liquidity, different accounting methods and economic and political systems, and higher transaction costs. These risks typically are greater in emerging markets. Securities of small- and medium-sized companies tend to have a shorter history of operations, be more volatile and less liquid. Value stocks can perform differently from the market as a whole and other types of stocks. The material is provided for informational and/or educational purposes only and is not intended to be and should not be construed as investment, legal or tax advice and/or a legal opinion. Investors should consult their financial and tax adviser before making investments. The opinions referenced are as of the date of publication, may be modified due to changes in the market or economic conditions, and may not necessarily come to pass. Information and data presented has been developed internally and/or obtained from sources believed to be reliable. Aristotle Boston does not guarantee the accuracy, adequacy or completeness of such information.
Past performance is not indicative of future results. The information provided in this report should not be considered financial advice or a recommendation to purchase or sell any particular security.
Differing historical time periods are selected throughout the presentation as we believe specific periods provide the most informative historical analog for the concepts presented.
The Russell 2000® Index measures the performance of the small cap segment of the U.S. equity universe. The Russell 2000 Index is a subset of the Russell 3000® Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership. The Russell 1000® Index The Russell 1000® Index measures the performance of the large-cap segment of the US equity universe. It is a subset of the Russell 3000® Index and includes approximately 1,000 of the largest securities based on a combination of their market cap and current index membership. The Russell 1000 represents approximately 93% of the Russell 3000® Index, as of the most recent reconstitution. The Russell 2000 Growth® Index measures the performance of the small cap growth segment of the US equity universe. It includes those Russell 2000 companies with relatively higher price-to-book ratios, higher I/B/E/S forecast medium term (2 year) growth and higher sales per share historical growth (5 years). The Russell 2000 Value® Index measures the performance of the small cap value segment of the US equity universe. It includes those Russell 2000 companies with relatively lower price-to-book ratios, lower I/B/E/S forecast medium term (2 year) growth and lower sales per share historical growth (5 years). The volatility (beta) of the portfolios may be greater or less than the benchmark. It is not possible to invest directly in this index.
Aristotle Capital Boston, LLC is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about Aristotle Boston, including our investment strategies, fees and objectives, can be found in Form ADV Part 2, which is available upon request. ACB-2509-4
