The Russell 2000 (IWM) has fallen about 17% from its November highs, but its forward P/E multiple is not indicating a recession, according to Bank of America (BAC). Historically, corrections of over 15% occur every 1.5 to 2 years, with the last one happening in 2023. However, small-cap sell-offs during U.S. recessions have been more severe, with declines of around 35-40%.
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Despite this, the Russell 2000’s earnings have not yet troughed after the 2023 EPS recession. Earnings are currently 38% below their prior peak, and typically, small caps trade at a higher P/E ratio on trough earnings. For reference, the median trailing P/E ratio for small caps during EPS recessions since 1989 has been 42x, which is lower than the current ratio of around 60x. As a result, this implies that investors are expecting an EPS recovery.
In terms of valuations, small caps are trading at 14.2x forward P/E, which is 6% below their average since 1985. Mid-caps and large caps, on the other hand, are trading above their averages. According to BofA’s Jill Carey Hall, P/E valuations are best for predicting long-term success, and current valuations suggest that the Russell 2000 will have 9% annualized price returns over the next decade versus 5% for mid-caps and 1% for large caps.
Is IWM Stock a Good Buy?
Turning to Wall Street, analysts have a Moderate Buy consensus rating on IWM stock based on 1275 Buys, 613 Holds, and 54 Sells assigned in the past three months, as indicated by the graphic below. After a 9% year-to-date decline, the average IWM price target of $277.47 per share implies 37.8% upside potential.
