Everyone’s Ignoring Small Cap Value—That’s Why It’s Interesting

Market Signals Suggest Resilience

D.R. Horton (largest U.S. homebuilder) surged 16% in a single day—its biggest move since 2009.
This suggests confidence in the housing sector and broader economic health.
Homebuilders are key economic bellwethers; their strength often signals resilience ahead.

Valuation Discrepancies: A Reversal May Be Coming

Persistent outperformance of large cap growth over small cap value continues:
- Year-to-date (through Q2): Large Cap Growth: +6% versus Small Cap Value: –3%
- This trend has dominated since the financial crisis—but may be due for a reversal.
Valuation spread is historically extreme:
- Large Cap Growth trades at 21x EV/EBITDA, implying a 4.76% cash flow yield—barely above the 10-year Treasury at 4.3%.
- The last time this happened? 1999, just before the tech bubble burst.
From 1999–2006, small cap value outperformed large cap growth by 2,100 bps annually, with Russell 2000 Value: +185% and Large Cap Growth: –30%

Dollar Weakness Could Fuel Small Cap Upside

The U.S. dollar declined 10.7% in the first half of 2025—its worst start since 1973.
A weaker dollar + inflation historically aligns with higher nominal GDP growth.
This environment benefits cyclical, economically sensitive companies—typically found in small cap value.

The Setup for Small Cap Value Is Compelling

Valuation + macro tailwinds favor small and mid-cap value equities:

Structural inflation and rising rates support relative outperformance.
Economic data is surprising to the upside—setting the stage for more positive re-ratings.
Recent trading day saw 150 bps of outperformance by small cap value versus large cap growth—a potential preview of what’s to come.

Conclusion

Investor sentiment appears capitulated against small cap value—often a contrarian buy signal. As macro and valuation dynamics shift, small and mid-cap value could deliver outsized returns over the next market cycle.
Now may be an ideal time to reevaluate portfolio exposure to these underappreciated segments.

Read more insights in Bill’s latest investment letter: It Often Rhymes

Comments from Miller Value LIVE Investor Call dated 7/22/25

Bill Miller IV, CFA, CMT is CIO and a portfolio manager for Miller Value Partners.

Miller Value Partners, LLC (“MVP”) is a registered investment adviser. More information is available at https://adviserinfo.sec.gov/firm/summary/110632

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Basis point (bps) is one hundredth of one percent. EV/EBITDA is Enterprise Value to Earnings Before Income, Taxes, Depreciation, and Amortization and is the enterprise multiple and is used to determine the value of a company.