Articles by Phil Segner, CFA Co-Portfolio Manager & Sr. Analyst

Large Cap Growth is back in gear and nearing its September 2020 relative-strength high versus Large Cap Value.

Using non-normalized trailing operating earnings, Small Caps are selling at an 18% valuation discount to Large Caps. At the end of March, we had an 8% discount for Small Caps. Since then, the Russell 2000 has done its best to tread water with a +0.5% gain, while the S&P 500 has shot +11.1% higher.

With the first month of Q2-21 earnings in the books, our Up/Down ratio reads an incredible 4.52. Since we were building-off one of the weakest readings in this vignette’s history (0.63 from Q2-20), we knew a big number was coming but, still, this is quite a shock.

Make that six consecutive months of advances for the S&P 500. Since the end of January, the index has gained 18% (price return) while our downside-to-median estimates have widened very little, to -43% from -41% (1957-to-date) and to -32% from -29% (new era 1995-to-date).

If you want to see a rocket ship, there’s no need to crane your neck upwards to see the latest exploits of our billionaire space cowboys. Rather, look to our earnings glidepath chart and marvel at the contrails of the 2021 full year operating earnings for the S&P 500. 

If you want to see a rocket ship, there’s no need to crane your neck upwards to see the latest exploits of our billionaire space cowboys. Rather, look to our earnings glidepath chart and marvel at the contrails of the 2021 full year operating earnings for the S&P 500.  

The S&P 500 posted its fifth consecutive monthly advance in June and its fifth consecutive quarterly advance as we closed out Q2-21. The index’s 8.2% second quarter gain has not exacerbated our downside-to-median estimates, which stand exactly where they did at the end of March.

The much-publicized rotation out of Growth and into Value and Cyclical stocks may have ended in Q2. Bond yields retreated and the specter of ruinous inflation receded. Also gaining traction: the notion that outrageous earnings and economic growth numbers we’re currently seeing are not long for this world. From bust-to-boom-to-moderation in record time?

Large Cap Growth came storming back in Q2 and closed its performance gap with Value and Cyclical stocks. Small Value still leads all the other style boxes: +26.7% YTD.

Using non-normalized trailing-operating earnings, Small Caps are selling at a 21% valuation discount to Large Caps. Measured back to March, our Ratio of Ratios has delved deeper into Small Cap discount territory—from 8% to today’s 21%.

As we roll-in the final month of Q1 earnings, our Up/Down ratio reads 1.93. This incredibly strong “three-month” figure falls into the 94th percentile of our 38-year history—and is just shy of the first two (tax-rate juiced) quarters of 2018.

CPI figures for the last two months have pummeled estimates and set multiyear records. Equity and fixed income markets seem to be comfortable in the Fed’s assessment that these high inflation prints are transitory.

The S&P 500 posted its fourth consecutive winning month in May. It was a modest gain (+0.6%), but all of our downside estimates managed to improve—a testament to the rapidly rising fundamentals.

In May, we saw a reversal of April’s reversal—quickly bringing us back to the contemporary trends of Value and Cyclical stocks beating Growth, Equal Weighted beating Cap Weighted, and the Tech Titans failing to keep pace. The Equal Weighted S&P 500 has outperformed the Cap Weighted measure by 15.4% since August 2020.

April’s Large Cap Growth bounce didn’t follow through in May. Growth’s 2020 relative gains have been nearly erased in the Mid and Small Cap spaces. Large Caps still have a ways to go.

Using non-normalized trailing operating earnings, Small Caps are selling at a 14% valuation discount to Large Caps—matching April’s Ratio of Ratios. Absolute trailing multiples shrank by equal amounts for both market-cap tiers as another darker, “pandemic month” rolled off the back end.

As we roll-in the second month of Q1-21 earnings, our Up/Down ratio reads 1.93. This is comparable to some of the best ratios of the 2016-2019 earnings cycle and, given the earnings divot of 2020, we expect to see similar figures through the rest of the calendar year.

The rank-and-file rally we’ve seen since August took a break as the five Tech Titans (22% of the cap weight) regained their footing and contributed 40% of the month’s return. Is it a coincidence the ten-year Treasury yield had its first significant monthly decline since July? Most certainly not.

Large Growth was the best-performing style box for April but it has underperformed nearly everything else YTD—most notably, Small Cap Value and our Deep Cyclicals Group.

As the S&P 500 continues setting new records, so do our downside-to-median estimates. Once again, dramatically improving fundamentals could not keep pace with the index’s rise in price.