Weakness in Homebuilders doesn’t bode well for Small Caps
Through Friday the S&P 1500 Homebuilders sub-industry was down more than 7% from its early-September high. In recent years when we’ve gotten a lot of inbounds on Small Caps, we’ve also tended to get questions on Homebuilders and that’s been the case again over the past few weeks as well.
This time around, we think it’s because both have been viewed as ways to play Fed cuts. With this in mind, we took a look at Russell 2000 performance relative to the S&P 500 and compared it to S&P 1500 Homebuilders performance relative to the S&P 1500 (both using a relative ratio). The two time series have mostly moved in sync with one another most of the time since early 2024, at least until recently.
Interestingly, Homebuilding performance hit a high relative to the broader market in early September then began to underperform. But the RTY/SPX ratio has continued to move up as Small Caps have continued to outperform. Note that RBCCM’s Homebuilding analyst Mike Dahl, has maintained a cautious view on the Homebuilders. From our seat, our industry-level work suggests valuations for the Household Durables industry (which contains Homebuilders) lack appeal and earnings revisions have been weak.
The earnings chart that’s still bothering us
We continued to see some slight slippage in the rate of upward EPS estimate revisions for the S&P 500 in last week’s update. Digging in deeper, the slippage has been generated by deteriorating trends in the S&P 500 excluding the top 10 market cap names. The rate of upward EPS estimate revisions has continued to strengthen for the top 10 names, which helps explain the resurgence in leadership of those biggest market cap stocks and Growth stocks generally in recent trading. Overall, this divergence in earnings sentiment is a negative data point for the broadening leadership thesis.
Bulls bounce back
Net bulls on the weekly AAII survey improved in last week’s update. As of 9/18/25, the weekly data point for net bulls had moved back up to -0.7%, while the four-week average was back to -9.43%. For now, the four-week average is still in the -1 to -2 standard deviation range that has historically been followed by a +15% 12-month-forward return in the S&P 500, but the weekly data point is not.
We’ve spoken at several group events for institutional investors over the past few weeks, in which one of our colleagues had asked those who expect stock prices to be higher by year-end to raise their hands. Most hands had gone up. While the AAII survey is of individual investors, its latest move also seems to capture the shifting mood of institutions.
