Russell at 25x earnings: RUT—always promising, never delivering growth.

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The perception that the Russell 2000 Index (RUT) is always promising growth but never delivering is rooted in its historical performance and current valuation. As of now, the RUT is trading at a price-to-earnings (PE) ratio of 25x, which is quite high. This high valuation suggests that the RUT is overdue for a correction. Historically, the Russell 2000 has struggled to meet growth expectations, often falling short compared to other indices.

In contrast, the Nasdaq 100 (QQQ) is trading at a PE ratio of 28x. While this is also high, the Nasdaq 100 has a proven track record of delivering real, demonstrated growth, making it a more reliable option for investors seeking consistent returns. The Nasdaq 100’s focus on innovative and high-growth companies has driven significant returns for investors over the years.

For comparison, the S&P 500 is currently trading at a PE ratio of 22x, the Equal Weight S&P 500 at 17x, and the S&P Mid Cap 400 at 16x. These ratios indicate varying levels of valuation and risk among different segments of the market.

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The Russell 2000, which tracks small-cap stocks, has frequently underperformed compared to these other indices. Its earnings growth estimates often fall short, and its performance is heavily reliant on a few sectors. For instance, the 24Q4 year-over-year blended earnings growth estimate for the Russell 2000 is 48.7%, but excluding the energy sector, the growth rate drops to 72.6%. This reliance on specific sectors makes the index less stable and more volatile.

Investors often look to the Nasdaq 100 for its consistent growth, as evidenced by its performance over the past year, delivering a return of 25.58%. The strong performance of the Nasdaq 100 can be attributed to its focus on large-cap technology companies, which have shown resilience and growth potential even in uncertain market conditions.

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The S&P 500 and its variations, such as the Equal Weight S&P 500 and the S&P Mid Cap 400, provide a broader and more diversified view of the market. The Equal Weight S&P 500, trading at a PE ratio of 17x, and the S&P Mid Cap 400 at 16x, offer lower valuations and potentially more stable growth compared to the Russell 2000 and the Nasdaq 100.

In summary, while the Russell 2000 often falls short of its growth promises and is currently trading at a high PE ratio of 25x, the Nasdaq 100 continues to deliver consistent growth with a PE ratio of 28x. The broader market, represented by the S&P 500 and its variations, offers lower valuations and more stable growth prospects.

Sources:

https://www.barrons.com/market-data/stocks/us/pe-yields

https://siblisresearch.com/data/russell-2000-pe-yield/

https://www.zacks.com/stock/chart/RUT.X/fundamental/pe-ratio-ttm

https://finance.yahoo.com/quote/QQQ/performance

https://www.invesco.com/qqq-etf/en/performance.html

https://x.com/MikeZaccardi/status/1880366667940974854


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