The Great Valuation Divide: Nasdaq 100 vs. Russell 2000

Awaiting the FOMC policy rate decision, Bill Cara examines the significant valuation disparity evident in the US stock market, particularly the gap in Price-to-Earnings (P/E) multiples between major indices like the Nasdaq 100 and the Russell 2000. His study highlights that tech-driven growth has propelled large-cap indices to high valuations, while small-cap companies face volatility and struggles due to their sensitivity to economic shifts. The text emphasizes that this divergence, fueled by factors such as AI enthusiasm, interest rate fluctuations, and differing earnings resilience, raises critical questions for institutional risk managers concerning market sustainability and potential turbulence. Furthermore, Bill explores the paradoxical impact of potential Federal Reserve rate cuts alongside a rising Secured Overnight Financing Rate (SOFR), suggesting that tightening market liquidity could counteract the intended stimulus, particularly for smaller companies. Ultimately, he cautions risk managers to maintain vigilance and diversification in a market characterized by concentrated risk and shifting fundamentals.