The second half of 2024 kicked off with a shifting global economic landscape shaped by anticipated rate cuts, evolving inflation trends, and large performance differences among stocks/sectors. Treasury yields dropped significantly in July, including the 2, 5, and 10-year benchmarks. Value stocks beat growth stocks by the widest margin in years, with the Russell 1000 Value outperforming the Russell 1000 Growth index by nearly 7% amid concerns around AI investment. Potential policy changes related to the election and geopolitical tensions remain at the forefront of investors’ minds. Since the inception of the S&P 500, there have been 23 presidential election years. Notably, in 19 of those 23 years, the S&P 500 has been up.
From 2009 to 2019, the S&P 500 equal-weighted index gained 320% while the S&P 500, which is weighted by market capitalization, advanced 258%, as the largest stocks lagged the rest of the market. However, since the end of 2019, there has been a shift, with the S&P 500 outperforming by 26% through the end of June. This outperformance was driven by a few of the largest stocks in the index, pushing the top 10 holdings to 37% of the S&P 500’s total weight. A decade ago, the 10 largest stocks made up less than 20% of the S&P 500. July marked a major reversal as the S&P 500 gained 1%, while the equal-weighted index climbed over 4%. This broadening of stocks moving higher is a good sign of underlying strength in the market.
Historically, the valuations of the market cap and equal-weighted indices have been quite similar, averaging a forward price-to-earnings ratio of 15.9 since 2009. However, as of July 31, 2024, the S&P 500 was trading at a price-to-earnings ratio of 20.8, compared to 16.5 for the S&P 500 equal-weighted index. Investors are paying a historically high premium for the largest stocks, expecting earnings to grow faster in the years ahead compared to the rest of the market. Investors are right to consider diversification beyond the largest stocks as the rest of the market trades at a wide valuation discount.
-Jared J. Ruxer, CFA, MS