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Foreign equities beat the U.S. in the first quarter, but the performance gap that’s opened up since the 2007 market highs remains astounding. While foreign equity valuations (especially within EM) have rebounded from February 2016 lows, the bounce has done little to close the enormous P/E discounts relative to the U.S. market.

Last month we highlighted the extraordinary performance gap that had opened up between crude oil and the relative performance of Energy stocks.

Based on a median of six measures, today’s S&P 500 valuation profile equates to the one prevailing on August 31, 1997. From there, the S&P 500 rallied >60% over the next 2 1/2 years before peaking. However, the same can’t be said of valuation readings for the “typical” or median stock.

While the Russell 2000 loss during the 2015-16 correction was almost double that of the S&P 500, the decline did not fully erase the P/E premium Small Caps have enjoyed since the middle of last decade. The premium might need to be entirely erased before a multi-year Small Cap leadership cycle can begin.

Second-half results showed the U.S. emerging from the 2015-2016 profit recession, and our early read is that the first quarter should show more of the same.

The distinction between reported GAAP earnings and adjusted operating earnings has long been a source of debate among fundamental investors, and the choice of “E” will materially impact each investor’s view of the market’s P/E ratio.

The S&P 500 has gained about 5% on the year, respectable but hardly consistent with the “melt up” scenario we thought might occur.

Not a lot of month-over-month action for the S&P 500. But, on March 21st, the index finished down 1.24% putting an end to a run of 110 trading days without a decline greater than 1%—the longest such stretch in 22 years.

Growth stocks, which took a relative pummeling in 2016, beat Value all three months of the first quarter. Small Cap Value stocks are the only segment still in negative territory YTD.

Our Ratio of Ratios has bounced between premium and discount for Small Cap stocks the last few months. Keep in mind that both the S&P 500 and the S&P 600 made new multi-year LTM P/E ratio highs in March.

The Up/Down Ratio sports a final “three-month” reading of 1.33 for Q4. The steady progress seen throughout 2016 came to a halt with the last two months of Q4 results—a disappointment, indeed.

Homefurnishing Retail, Property & Casualty, and Technology Distributors are among the month’s intriguing opportunities based on the current Group Selection (GS) Scores.

Shifting consumer preferences and the relentless rise of e-commerce are changing the sector’s beneficiaries of the healthy backdrop away from retail, yet other Discretionary opportunities abound outside of the traditional retail groups.

With the “Trump Trade” in question, investors have been flocking to companies delivering tangible results.

We recommend going up in quality across the whole fixed income spectrum.

We recommend going up in quality across the whole fixed income spectrum.

The tapering of QE, clearly a tightening move, complicates the definition of the current tightening cycle.

The MTI remains safely in the positive zone. Accordingly, equity exposure is currently positioned at 67%, near the high end of our bullish range of 50-70%.

Read this week's Major Trend Index.