It Often Rhymes

After plunging almost 19% from its late February peak to the April 8 closing trough, the stock market staged a quick rebound in the second quarter of 2025. The S&P 500 came roaring back to hit a new all-time high over the course of 89 trading days, marking the fastest time to a new high after a drop of at least 15%. The market making a new all-time high should not be news, especially with the US money supply (M2) hitting all-time highs, but two developments were especially noteworthy – namely, the abysmal performance of the United States dollar, along with the relative performance of large cap growth names hitting a new all-time versus their small-cap value-oriented brethren, a dynamic we do not expect to last into perpetuity.

The US dollar began 2025 with six consecutive monthly declines, slashing its value by 10.7%, indicating the worst start to a year for the greenback since 1973 shortly after floating at the end of the Bretton Woods era, a roughly three-decade period of the US dollar being pegged to gold. Concerns around inflation caused by deficits, money printing and economic isolationism have helped gold, or “legacy Bitcoin” as we call it, double off its multi-year low in the fall of 2022 (Bitcoin is up nearly 6x over the same period). The weak dollar has helped the performance of both hard assets as well as emerging markets.

One group that has historically benefitted from such a dynamic is smaller capitalization stocks with lower multiples. This has not happened in 2025, as the Russell 2000 small-cap value index (RUJ) closed the quarter down 3.16% year-to-date, while the Russell 1000 large-cap growth index (RLG) is up 6.08% since the start of the year. The stark performance discrepancy has persisted for the better part of nearly two decades since the global financial crisis, and not undeservedly. So-called “value” securities often trade at low multiples not because they are mispriced, but because they are bad businesses; indeed, the best-performing assets of all time rarely looked like a value to the near-sighted.

However, there are fair prices for great businesses and bad ones. The aforementioned large-cap growth index’s trailing EV/EBITDA multiple is approaching 21x, meaning that the pre-tax cash flow yield at these prices provides little, if any, premium over the 10-year government bond, whose nominal annualized return is guaranteed to those who hold until maturity. The last time large-cap growth provided no marginal trailing cash flow yield above the 10-year was in 2000, just prior to the bursting of the tech bubble, which coincided with the start of a seven-year period¹ over which small-cap value trounced large-cap growth and the market as a whole, while the US dollar lost 40% of its value.

Of course, stretched absolute and relative multiples in no way guarantee that smaller-capitalization or lower-multiple stocks will outperform. High multiples can get higher, low multiples can go lower, and fundamental surprises will occur. But we believe the probabilities favor smaller capitalization stocks with low embedded expectations playing a little catch up to their higher-valued peers with lofty investor expectations. There are limits to the economic contributions from companies that need little labor to grow, and the required surprises to justify multiple growth beyond these levels has not occurred in the past. Consider that large-cap growth is approaching its prior peak valuation as the group’s capital intensity surges; meanwhile, small-cap value trading at reasonable multiples would benefit meaningfully from positive economic growth surprises. Add in a cherrypicked dove to head the Fed along with some animal spirits, and you might have an explosive recipe for small-cap value outperformance.

As the largest investors in our strategies, we appreciate your partnership and welcome any questions or comments.

¹12/31/2001 – 12/31/2008

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The S&P 500 Index is a market capitalization-weighted index of 500 widely held common stocks. Investors cannot invest directly in an index and unmanaged index returns do not reflect any fees, expenses or sales charges. The Russell 2000® Index is a small-cap stock market index that makes up the smallest 2,000 stocks in the Russell 3000 Index. The Russell 1000® Growth Index measures the performance of those Russell 1000 Index companies with higher price-to-book ratios and higher forecasted growth values. EV/EBITDA ratio compares a company’s enterprise value to its earnings before interest, taxes, depreciation and amortization and measures the value of a company. Free cash flow yield is an overall return evaluation ratio of a stock, which standardizes the free cash flow per share a company is expected to earn against its market price per share. The ratio is calculated by taking the free cash flow per share divided by the share price.

The information presented should not be considered a recommendation to purchase or sell any security and should not be relied upon as investment advice. It should not be assumed that any purchase or sale decisions will be profitable or will equal the performance of any security mentioned. References to specific securities are for illustrative purposes only. Portfolio composition is shown as of a point in time and is subject to change without notice.

The views expressed in this commentary reflect those of the author as of the date of the commentary. Any views are subject to change at any time based on market or other conditions, and Miller Value Partners disclaims any responsibility to update such views. These views are not intended to be a forecast of future events, a guarantee of future results or investment advice. Data from third-party sources cited herein is believed to be reliable, but may not have been independently audited by Miller Value Partners.