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

As we turn the page on 2020, a peek ahead to the S&P 500’s 2021 operating earnings is probably in order. You never know, earnings and valuations might be important again one day.

Apple, Microsoft, and Amazon collectively added $2 trillion in market cap over the past twelve months, and ended 2020 making up 16.4% of the S&P 500. Those three firms were responsible for a little more than one-half of the index’s +18.4% total return for the year.

Across all of our market-cap breakdowns, Growth beat Value by at least 30% in 2020. In the Royal Blue Index, Growth beat Value by 38%—the largest annual gap between these Growth and Value segments since Growth’s 39% outperformance in 1999.

Half of the Small Cap discount registered at the end of March 2020 (36%) has now been erased. Small Caps have outperformed Large since that extreme reading (Russell 2000 +71%; S&P 500 +45%).

Adding in the third month of Q3-20 earnings reports produces an Up/Down ratio of 1.09. Once again, this figure is pretty terrible relative to this vignette’s history—it is at just the 10th percentile of observations. Lower hurdle rates for Q1-21 will breathe life back in earnings growth.

The S&P 500 gained another 3.7% in December to close the year with a price return of +16.3%.

As we turn the page on 2020, a peek ahead to the S&P 500’s 2021 operating earnings is probably in order. You never know, earnings and valuations might be important again one day.

The S&P 500 ripped to new all-time highs in November, posting a 10.8% gain. This move pushed our downside to median estimate for the index from -36% to -41%.

The Equal Weighted S&P 500 completed its third consecutive month of outperformance over the Cap Weighted measure in spectacular fashion. The 3.3% advantage was the largest monthly win for the more democratic flavor since April of 2009.

In a stunning reversal, Small Cap Value has outperformed our Royal Blue Growth by 22% over the last two months. Despite the huge about-face, Small Value is still very undervalued relative to Large Growth.

November’s Small Cap surge hasn’t affected our Ratio of Ratios in a dramatic fashion. Trailing valuations, both for Large and Small Caps, have increased equally in this vignette.

Folding in the second month of Q3-20 reporting produces an Up/Down ratio of 1.08. Keen observers will note little deterioration from the “one-month” figure of 1.14. Historically, there is a 20% haircut to the ratio after adding in the second month of results.

Small Cap Value was the top performing style box in October—the first time in recent memory. Its YTD underperformance versus our Royal Blue Growth segment is still nearly 40%.

As we start Q3-2020 reporting, our first Up/Down ratio reads 1.14. Although this observation is in the eighth percentile of our 37 years of data, it is shockingly better than the two quarters that preceded it (0.72 and 0.63).

Late-month weakness led to another monthly decline in the S&P 500. Now down roughly 7% since the end of August, our downside-to-median estimate has moved from -42% to today’s -36%.

Which box do you check? The “status quo” or the “change of pace?” Keep in mind, the same decision in front of you turned out to be extraordinarily important four years ago. So, which will it be for 2020 and beyond? Large Cap Growth or Small Cap Value?

AAPL (-10%), MSFT (-7%), AMZN (-9%), GOOG (-10%), and FB (-11%) all underperformed individually, and as a group, for only the second time in the last twelve months. Did these firms’ popularity hit a peak in that first week of September, or was it just a much needed breather?

Our Deep Cyclical Group gained 18%, besting Royal Blue Growth (+15%) for the first time in recent memory. Growth stock valuations are stretched to 1999 extremes. Value, while historically overvalued, is a relative steal.