The big jump in Small Caps over the last two weeks has entirely reversed the segment’s summer underperformance and has technicians feverish about another “breath thrust.” Technically, it’s impressive, but we are more intrigued by the fundamental potential for continued Small Cap (and Mid Cap) outperformance.
Our “Early Cyclicals” composite continues to perform so well—and at such a late stage in the market cycle—that we should probably consider changing its name. This group, which consists of retail, housing, and auto-related industries, is up 29% in the last eight months after stalling out for the first three quarters of 2014. Its “Late Cyclical” counterpart is up just +5% over the same time frame.
The S&P 500 record median profit margin of 10.3% is now almost a full percentage point above the last cycle’s peak of 9.4% (second quarter of 2007). Trends across S&P sectors are not as uniform as one might expect, though, with only half of the ten sectors last quarter at profitability levels that exceeded their 2001-2007 expansion highs.