Chart of the Week
Large cap stocks have led markets higher over the past decade, but that may be starting to change.
Academic research showed that small companies had a return premium over large caps for 80 years until 2010. With a lower sector weighting in technology, interest rate costs up, and lower profit margins, small caps could not keep up with larger peers.
In July, we witnessed a reversal of this trend. The S&P 600 Small Cap Index jumped as interest rate cuts came into view, an underweight position from investors, and the possibility of lower regulation.
Small caps have become the cheapest to large caps since the early 2000s. The only other time the price-to-earnings multiple was at this discount was in the 1970s. We will see if the mean reversion in results continues.
What We’re Reading
The Folly of Certainty – Howard Marks, Oaktree
Housing Analyst Sees this Market Closer to 1978-1982 – Resi Club Analytics
Which Country Should Design U.S. Industrial Policy? – Carnegie Endowment
Rebalance Your Portfolio to Tame Risk, Not to Increase Returns – Morningstar
Podcast of the Week
The Supreme Court vs the Regulatory State – JPMorgan, Eye on the Markets
Last Week
Earnings season just kicked off with 21% of companies in the S&P 500 Index reporting. Earnings grew over 10% while sales are up 3%. The surprise versus analyst estimates are what markets care about most, and earnings are beating by 5.5% on the upside. Existing and new home sales both came in lower than expected. The S&P manufacturing survey showed a contraction. On the upside, the Philly Fed Business Index was near the highest level in the past two years.
The Week Ahead
The price index data will be updated on Friday, with a further decline in the rate of change expected. Consumer confidence and sentiment data will be interesting to watch as spending has been softer at the margin. The Federal Reserve Open Market Committee meets on Wednesday of next week. Investors believe the Fed will set the table for the first interest rate cut at the following meeting in September.
Thank you for reading.
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