In the summer heat, even an investor following the market with one eye could not have missed the recent turbulence in large technology companies. The technology index Nasdaq Composite plunged 3.6 percent on Wednesday, its biggest daily drop since 2022.
However, the same hymn has not been repeated in small companies. The small company index Russell 2000 has jumped by more than ten percent in a month, when July’s inflation figures and the disappointing results of technology companies caused capital to move from large companies to small companies.
With the rise, the p/e number of the Russell 2000 index has risen to 15.7, according to the information service FactSet, which is the highest level in 2.5 years. However, the level during the corona peaks is far away, as it should be in the current interest rate environment. However, the most blatant undervaluation has disappeared at the index level. Other valuation metrics also tell the same story.
What should an investor think about this?
Although the valuations of small and large companies have increased, we cannot yet speak of the euphoria of the corona bubble. However, there are some signs that technology companies are overheating.
The rocket of technology companies Nvidia is very hot paper. According to Nordnet, which is popular with small investors, more Nvidia was bought in June than all Finnish stocks combined.
Although Nvidia’s rise is underpinned by strong fundamentals and profit growth, the continuation of the rise is very uncertain. According to Bloomberg’s estimate, Nvidia’s ten largest customers account for 60-70 percent of the turnover. This mainly includes other large technology companies, such as Alphabet, Meta and Microsoft.
The order flow can cool down surprisingly quickly when Nvidia’s major customers have started their artificial intelligence infrastructure. Although new and smarter models require more robust computing equipment, we hardly see a rush of orders like in recent times.
Those chasing big returns often end up with a black Pekka. Especially when the current valuation levels of these companies do not forgive disappointing results.
At the index level, the largest discount sale in small companies has already passed, but the index is still valued around ten percent below its ten-year median. The power of the momentum phenomenon should also not be underestimated, and the rise often continues longer than many people think.
If the analysts’ predictions hold true, the small company party is just beginning. Analysts expect the combined earnings per share of the companies in the Russell 2000 index to rise next year by 37 percent from the current year’s forecasted level. If and when interest rates continue to fall, momentum will also come from rising valuation factors. It may be wise to repatriate the winnings slowly this time as well.
Source: www.arvopaperi.fi
