Can small caps shake their slump?
Nasdaq up ~0.2%, S&P 500 ~flat, Dow down ~0.7%
Cons Disc leads S&P sector gainers; Materials weakest group
Euro STOXX 600 index up ~0.1%
Dollar lower; crude off ~1%; gold up; bitcoin up ~1.1%
U.S. 10-Year Treasury yield dips to ~4.20%
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CAN SMALL CAPS SHAKE THEIR SLUMP?
Small cap stocks have dramatically underperformed large caps since 2018, a period that coincides with the mega-cap growth boom that has dominated market headlines.
Here is a chart of the S&P 600 small cap index .SPCY/S&P 500 index .SPX ratio over the past seven years or so:
Scott Opsal, director of research & equities at the Leuthold Group, took a look at whether the small cap slump was due to the mathematical impact of top-heavy performance dictated by the Mag 7 effect, or whether small cap weakness was spread across the breadth of the economy.
"Our study indicates that earnings growth has been similar between size cohorts, but valuation changes have followed much different paths," writes Opsal in a note.
He adds: "We also found that valuation changes were not confined to Info Tech and Comm Services, but extended across all types of industry groups, even those not connected with the tech and innovation boom."
Leuthold Groups' conclusion is that the small cap malaise is more the result of a "wide" shortfall across industries rather than a "deep" hole dug by the two leading sectors.
In Opsal's view, large cap valuations are extremely elevated when compared to the last 20 years, but small caps are much more reasonably priced.
Finally, he says that the valuation gaps between size cohorts are wider than normal, which offers a margin of safety to small cap investors.
This leads Opsal to say "What we can't speak to is the ultimate dynamic that will cause large cap valuations to falter or small cap valuations to close the gap, but if the S&P 600’s earnings growth can continue to track with the 500, the chances that this valuation gap will narrow make small caps an intriguing proposition."
(Terence Gabriel)
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FOR THURSDAY'S EARLIER LIVE MARKETS POSTS:
THURSDAY ECONOMIC DATA: SOFTENING YET SOLID - CLICK HERE
S&P 500 INDEX SEES ANOTHER SPOOKY TURN - CLICK HERE
ASIA FUNDS' CHINA HOLDINGS AT FIVE YEAR HIGH - HSBC - CLICK HERE
GREEN LIGHT AHEAD? CITI SEES YEAR-END AUTO RALLY - CLICK HERE
A MORE INTERESTING WAY TO PLAY THE YIELD CURVE - CLICK HERE
STOXX UP, MOST SECTORS IN THE GREEN -CLICK HERE
EUROPE BEFORE THE BELL: TESLA AND OTHER EARNINGS FOR BREAKFAST - CLICK HERE
PMIS TAKE CENTRE STAGE - CLICK HERE
SPCYSPXRatio10242024 https://tmsnrt.rs/3Ymn6nC
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