Research.LeutholdGroup

The Up/Down ratio reads 1.31—below average. The first quarter’s earnings reports failed to build on 2024’s broadening, but still modest EPS growth story. A reversion to the awful figures of 2022 and 2023 is not guaranteed, although trends in this data have been quite binary, especially over the last ten years.

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For the first time since November 2024, the Russell 2000 posted a better monthly return than the S&P 500! The excellent Q2 results for each segment have pushed up their absolute valuations, but both are still well short of their contemporary highs.

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Value in Q1, Growth in Q2.

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As the market dismissed wild trade-policy uncertainty and the U.S. lobbing missiles at Iran, the index posted a tidy +11% for Q2 (following a Q1 loss of 4%). A little over half of the S&P 500’s return of the last three months was contributed by inspired performance from Microsoft (+33%), Nvidia (+46%), and Broadcom (+65%).

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The Up/Down ratio reads 1.30—below average. This “two-month” print breaks a streak of four successively higher readings, and is even more disappointing given that last year’s look-back comparison for this “two-month” period was very weak (1.18).

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Our Ratio of Ratios continues to go nowhere, as six of the past seven months registered a Small-Cap discount of either 25% or 26%. Large-Cap outperformance and a worsening Small-Cap earnings profile seem to have balanced out overall relationship.

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In the Large- and Mid-Cap spaces, Growth’s two-month surge erased Value’s YTD advantage. Since the end of March, RB Growth: +11%; RB Value: -3%; MC Growth: +13%; MC Value: +2%.

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The 19% surge from the closing low on April 8th, through May, has been fueled by the largest firms. Out of the Mag 7 names, only Apple (+17%) underperformed the overall index; the average gain among the other six registers at +33%. Let’s not forget, it was these very names that led the S&P 500 lower—and the equal-weighted Mag 7 basket is still down 5% YTD.

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The Up/Down ratio reads 1.53, which is below average. This “one-month” print breaks a streak of four successively higher readings. For the last twenty years or so, our Up/Down ratio has been pretty consistent about either being in an improving cycle or a deteriorating cycle. Is the mini upswing over?

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Our Ratio of Ratios sits right on top of its one-, two-, and three-year moving averages. The Small Cap discount has been greater than 20% for all three of those periods. For years, we’ve said that a recession was probably needed to change this valuation dynamic. So far, the mounting prospect of a recession has only exacerbated Small Caps’ plight.

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After Royal Blue Value’s huge relative win in March (+7%), Royal Blue Growth posted its best relative performance month since 2001, with a 10% advantage over Value.

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In early April, the popularity search for “NYSE circuit-breaker levels” spiked. The S&P 500 came within a whisker of an official bear market. Then, following a Presidential tweet to buy, the largest daily gain since October 2008 came along. By the end of the month, the index was riding its longest daily winning streak since November 2004. All of that turmoil and heartburn led to a -0.7% month-over-month change for the S&P 500.

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The Up/Down ratio reads 1.41. This final figure for 2024 marks four consecutive quarters of improvement. Will the broadening earnings-growth story continue in 2025? Soft look-backs and momentum will have to overcome the renewed possibility of an economic recession.

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Up markets or down markets, Small Caps have chronically underperformed Large Caps over the past three years. Why hasn’t the Ratio of Ratios continued to move farther south instead of sideways? Despite the relative weakness in the “P” for Small Caps, the shrinking “E” means the P/E ratio stays elevated.

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Royal Blue Value, our mega-cap value proxy, was the only style box in positive territory for Q1, turning in an impressive 7% gain. Relative to RB Growth (-5%), RB Value had its best quarter since Q1-22.

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The Magnificent Malignant Seven posted an average return of -16% in Q1, with META (-2%) being the only firm not down double digits to start 2025. These plow horses of the past two years contributed all of the Q1 loss (and then some) for the Cap Weighted S&P 500 (-4.3%). Outside of the $2.8 trillion market-cap damage from those firms, the Equal Weighted S&P 500 was just about flat for Q1.

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The Up/Down ratio reads 1.47—the best “two-month” figure since Q4-21 (1.54). This vignette seems to be telling us we’re finally experiencing a broadening in YOY EPS growth and an economic recession isn’t in the offing.

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Our Ratio of Ratios continues to be locked in a range as the preference for Large Caps persists. And who can blame the market? S&P 600 trailing EPS has shrunk 30% over the past three years compared with an EPS expansion of 10% for the S&P 500.

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Over the last year, returns between Growth and Value have been very similar within cap structures: Royal Blue Growth +14%, RB Value +17%: Mid-Cap Growth +15%, Mid-Cap Value +12%; Small-Cap Growth +6%, Small-Cap Value +8%.

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The Trump Bump may have peaked on February 19th with a post-election S&P 500 gain of 6.7%. By the end of the month, that had dwindled to +3.4%. The Russell 2000 has fared much worse, now down 4% since the November 5th close. Contrast that with 2016’s post-election surge where the S&P 500 was up 11.2% and the Russell 2000 gained 16.5% from election day through February 2017.

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