Stock Market Internals Earnings Momentum, Small/Mid/Large Caps, Growth/Value/Cyclicals, and Additional Factors
Everything Looks Late Cycle
Our ratio reads 1.15—a nice bounce from the alarm-ringing “one-month” figure of 0.94 at the end of October. Still, this result is very much in the range of the past seven quarters’ “two-month” readings, which have an abysmal tally of 1.10 on average.
Small Cap vs. Mid Cap vs. Large Cap
November’s rising tide lifted all boats and our Ratio of Ratios is unchanged from the end of October. Absolute trailing P/E values for both Large and Small Caps spiked higher with the market, but remain well below readings seen at similar S&P 500 market levels at the end of July.
Small Cap Discount = 27%
Using non-normalized trailing operating earnings, Small Caps are selling at a 27% discount to Large Caps. November’s rising tide lifted all boats and our Ratio of Ratios was unchanged from the end of October. Absolute trailing P/E values, both for Large and Small Caps, spiked higher with the market, but are well below those seen at similar S&P 500 market levels at the end of July—another testament to this vignette’s most suitable benchmarks (Equal Weighted S&P 500 and S&P 600) lagging over that time period. Looking at full-year 2024 numbers, the Small Cap/Large Cap P/E discount is narrower at 23%.
Small Cap Discount = 27%
Using non-normalized trailing operating earnings, Small Caps are selling at a 27% discount to Large Caps. November’s rising tide lifted all boats and our Ratio of Ratios was unchanged from the end of October. Absolute trailing P/E values, both for Large and Small Caps, spiked higher with the market, but are well below those seen at similar S&P 500 market levels at the end of July—another testament to this vignette’s most suitable benchmarks (Equal Weighted S&P 500 and S&P 600) lagging over that time period. Looking at full-year 2024 numbers, the Small Cap/Large Cap P/E discount is narrower at 23%.
Growth vs. Value vs. Cyclicals
Large- and Mid-Cap Growth were the biggest winners (+12-14%), although all style segments benefited from the stock market upsurge. The advance by MC Value, SC Growth, and SC Value (+9% each) flipped their YTD losses to the positive side of the ledger as of November’s close.
Additional Factors
As we slice and dissect November’s performance, we find comfort in the uniformity of returns for the Cap Weighted measure, Equal Weighted average, and even our market-cap quintiles—which were all up around 9%. That is a stark change from the concentration of returns seen over the last ten months. The Cap Weighted S&P 500 ended November just 1.7% shy (via either price or dividend return) of eclipsing its 23-month-old highwater mark.
An Underwhelming Start
The number of firms beating on both the top and bottom lines has been underwhelming thus far. Those that missed EPS estimates have seen their equity drop an average of 4-5% relative to the index. That’s quite a bit higher than the usual 2-3% decline we’d expect given the history of data.
Small Cap vs. Mid Cap vs. Large Cap
The most appropriate proxies for this comparison, the Equal Weighted S&P 500 and the S&P 600, were down 4.2% and 5.8%, respectively, in October. Hence, the minimal 1% widening for the Small Cap discount makes sense.
Growth vs. Value vs. Cyclicals
Three of our six style boxes are now in negative territory for 2023. The Mega Cap Growth proxy—Royal Blue Growth (+16.4% YTD)—has been the only game in town.
Additional Factors
Another month, another yawning performance gap between the Cap- and Equal-Weighted S&P 500. Since the end of January, the more democratic of the two has underperformed the top-heavy version by nearly 14%. To find a nine-month span with greater relative underperformance for the Equal Weighted Index, you’d have to go all the way back to the very top of the Tech Bubble in March 2000.
Late Cycle Lingers
With Q2-23 reporting complete, the ratio reads 1.06. Based on the final numbers recorded for the last six quarters, it looks like the longest late-cycle earnings streak in this vignette’s history (average reading of 1.08).
Small Cap vs Mid Cap vs Large Cap
This month is the five-year anniversary of the last time Small-Cap and Large-Cap P/E ratios in our L3000 Universe were roughly equivalent. Price returns over the last five years tell most of the story about the widening Small Cap discount: S&P 500 +58%, S&P 600 +21%.
Additional Factors
Surging interest rates were the story of September, as the benchmark 10-year and 30-year yields both moved 50 basis points higher. The rate increases were felt most acutely by Utilities, as the sector ETF (XLU) fell over 13% in the twelve trading days from 9/15 to 10/2. XLRE, the Real Estate sector ETF, was squeezed as well, falling 11% during that same period.
Not Bouncing Back
Our latest ratio of 1.05 is awful. The improved earnings picture for the aggregated S&P 500 has not trickled down to the average firm. In this earnings vignette, where one firm gets one vote, EPS growth is still very hard to come by. That fact, and the narrowness of the 2023’s market strength are certainly linked.
Small Cap vs. Mid Cap vs. Large Cap
Our Ratio of Ratios is unchanged from July, as the average stock in both the S&P 500 and S&P 600 experienced similar pullbacks in August: -3.4% and -4.3%, respectively.
Growth vs. Value vs. Cyclicals
After mostly sitting out July’s rally, Royal Blue Growth was the only style box to advance in August. Its YTD advantage over Royal Blue Value is back to 20%.
Additional Factors
The market’s preference swung back to the familiar mega-cap names in August—even as the index broke a winning streak of five consecutive months. Better in up markets and better in down markets is a tough combination to beat. Nvidia (+238%) has contributed as much to S&P 500 performance as Apple (+45%) in 2023, despite starting the year with one-fifth of AAPL’s market cap.
Barely Above Water
Our latest ratio is a dismal 1.01. The “one-month” result is usually by far the strongest reading of a quarter (long-term average ratio of 1.85). You have to go back to July 2020—the depths of the pandemic—to find a worse “one-month” reading.
Small Cap vs Mid Cap vs Large Cap
Our Ratio of Ratios continues to narrow as smaller firms finally join in on the stock rally. Both the S&P 600 and Russell 2000 have out-gained the S&P 500 by 4% since the end of May.
Growth vs Value vs Cyclicals
Every one of our style boxes is having a terrific summer. Small Value’s +16% leads the pack over the last two months. Even with their recent advance, median P/E multiples for Small- and Mid-Cap Value stocks are still cheap compared to their 40-year histories.
Additional Factors
During the last two months, the Equal Weighted index has beaten the Cap Weighted version by 1.3%. That’s not much of a turnaround considering the 10.6% advantage for the top-heavy SPX from February to May. The seven largest firms (28% of the index weight) have contributed two-thirds of this year’s 20% gain in the S&P 500.
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