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Small Cap investing remains an exercise in futility, with the Russell 2000 already trailing the S&P 500 by more than 10% through early June. Even Technology stocks can’t escape the curse.

The contraction in full-time jobs completely explains this year’s sudden collapse in the growth rate of real personal disposable income. The rate has disintegrated from 4% at year-end 2023 to just 0.9% in April, and matches that which prevailed on the eve of the 1980 recession.

The 10-Yr./3-Mo. Treasury spread and the Near-Term Forward Spread both inverted in November 2022. Unless the peak of the current economic expansion is back-dated to March (very unlikely), the lag time between the inversion and any near-term recession will be the longest ever for a successful inversion signal.

The S&P 500 is like a beach ball one tries to keep underwater. Whether that particular sphere could also be described as a bubble is open to question.

Confidence in the economic soft-landing scenario probably peaked in early April. The past two months have brought a stream of disappointing data, dragging the Citi U.S. Economic Surprise Index below zero for the first time since early 2023. No problem… stock investors have shifted seamlessly into their “bad news is good news” mode.

With the Mag 7 driving S&P 500 returns on a daily basis, the other 593 stocks have become less correlated with the S&P 500’s day-to-day changes. Although dropping correlations are typically a good thing for active managers, we think this time is different.

While we have lightened Info Tech holdings, the portfolio continues to be positioned with exposure to both the big growers and economically sensitive cyclicals.

Nvidia’s +27% return in May means that this chip company now has a similar market cap and index weight as Microsoft and Apple (NVDA was less than one-fifth the size of AAPL just 18 months ago). In May, Nvidia contributed a little over one-quarter of the S&P 500’s return. For the first five months of 2024, the firm’s 121% gain has subsidized one-third of the index’s YTD performance.

Our Leuthold Deep Cyclical group continues to have an excellent 2024. This basket of 30 economically sensitive names (NVDA happens to be one of them) is up 15% YTD.

Our Small Cap discount has hardly budged this year, staying between 23%-26%. Looking at the best proxies for this vignette (the equal-weighted S&P 500 and the S&P 600), that range makes a lot of sense. Those two indexes are up 5.7% and 5.1%, respectively, through the first five months of 2024.

The Up/Down ratio is 1.18. This is the best “two-month” figure since February 2023 (Q4-22 results) but still way below the long-term average. We’re still far from what we’d call pervasive YOY EPS growth.

Economic numbers will likely continue to cool a bit, but more election-year policy measures will be forthcoming in the next few months, cushioning the downside for the economy.

Chinese investors have flocked to gold as traditional investments have massively disappointed. Global central banks are also buying gold amid heightened geopolitical tension. Both trends help explain why gold has defied the gravitational pull of a stronger dollar and higher real yields.

Despite the overwhelming superiority of small cap returns, historically, during the winter months, the last three years have not followed the script. Three consecutive failures of this powerful seasonal influence make us curious if there are other market conditions that may be negatively influencing the smalls.

Read this week's Major Trend.

The S&P 500 erased its April loss and set a fresh all-time high in May. Thanks to improved fundamentals, the weighted averages of these downside-to-median estimates sit just below their near-term highs of late March.

Today’s eight largest firms produced an average gross margin of 65% over the last fiscal year, a 15-point gain since 1999—and pretax margins are truly amazing. The striking level of profitability at the top of the S&P 500 explains the top-heavy nature of the bull market, and at least partially justifies valuations. 

Q1 bottom-up operating EPS for the S&P 500 sank slightly to $54.94 after the second month of reporting.  However, with reporting for the Index nearly complete, this figure is still 70 cents above the final pre-reporting estimate recorded at the end of March. The fifteen months of Q1 snail trail in Chart 1 shows remarkably consistent estimates, especially given our recent “ski slope” quarters of 2023. EPS estimates, at least in the aggregate, continue to hold up nicely for the other three quarters of 2024 reporting as well.

Read this week's Major Trend. 

Read this week's Major Trend.