Stock Market Internals Earnings Momentum, Small/Mid/Large Caps, Growth/Value/Cyclicals, and Additional Factors
Earnings Momentum
With the second month of Q2-2020 in the books, our Up/Down ratio reads 0.72. We agree that Q2 earnings have come in better than expected, but in this binary study of the “ups” versus “downs,” that element of managed expectations is not captured.
Small Cap vs Mid Cap vs Large Cap
Using non-normalized trailing operating earnings, Small Caps are selling at a 22% valuation discount to Large Caps. August marks the sixth consecutive month that our Ratio of Ratios has indicated a 20% or greater Small Cap discount.
Growth vs Value vs Cyclicals
And all that winning has translated into an extreme stretch in valuations. The median P/E ratio of our Royal Blue Growth segment is now 90% higher than its average measured back to 1982.
Additional Factors
In August, the S&P 500 notched its fifth consecutive monthly gain with the five largest firms accounting for nearly half of its 7% advance. Those companies are now within spitting distance of comprising 25% of the index—that’s a doubling of market cap for the five largest firms in just under three years.
Earnings Momentum
With the first month of Q2-2020 earnings in the books, our Up/Down ratio reads 0.63. This pathetic “one-month” figure joins only four other readings below 0.70 in our 36-year history.
Small Cap vs. Mid Cap vs. Large Cap
Small Caps are selling at a 25% valuation discount to Large Caps. The absolute P/E ratios for both cap flavors have risen roughly 40% from their March month-end lows.
Growth vs. Value vs. Cyclicals
For our Royal Blue segments, the Growth/Value P/E ratio is heading toward Y2K extremes at tremendous speed. We started the year near our long-term average of 2.23x and today it stands at 3.19x—easily the highest reading outside of the Tech Bubble.
Additional Factors
Year-to-date, the Equal Weighted S&P 500 has massively underperformed the Cap Weighted index. The return spread of 8.85% (price change) is the widest seven-month performance gap in favor of the Cap Weighted index since the top of the Tech Bubble.
Earnings Momentum
Our final Q1 Up/Down ratio reads 0.71. This miserable “three-month” figure is in line with the darkest three quarters of the Great Recession—the worst scores in our 27-year history.
Small Cap vs Mid Cap vs Large Cap
Three consecutive months of outperformance for Small Caps lifted our Ratio of Ratio from its contemporary low set in March. Trailing P/E ratios for both Large and Small-Cap segments are bound to feel significant upward pressure in the coming months as better earnings results roll off the back-end.
Growth vs Value vs Cyclicals
The market’s love affair with anything “Growth” is translating into the most expensive market-capitalizations for the growth segments that we’ve recorded since the Tech Bubble.
Additional Factors
The monthly gains from Microsoft (+11%), Apple (+15%), and Amazon (+13%) provided the entire S&P 500 price gain (+1.8%) in June. In the first six months of this tumultuous year, those three Tech Titans have added a combined $1 trillion in market cap.
Earnings Momentum
With the second month of Q1-2020 earnings in the books, our Up/Down ratio reads 0.75. This is only the seventh reading we’ve recorded below 1.0 in 145 quarters of our Up/Down history.
Small Cap vs Mid Cap vs Large Cap
Two consecutive months of outperformance for Small Caps has helped lift our Ratio of Ratios off its contemporary low. During the last two months, the absolute trailing P/E ratio has jumped from 11.6x to 15.9x for Small Caps, and from 18.1x to 22.5x for Large Caps.
Growth vs Value vs Cyclicals
Our Royal Blue Growth segment ended May with a 7% YTD gain. In just the first five months of 2020, that grouping has outperformed Royal Blue Value by nearly 21%.
Additional Factors
With the S&P 500 now within spitting distance of breaking even year-to-date, we seem to be witnessing an illusion worthy of David Copperfield. From the market’s perspective, the problems that were very much right in front of us during the limit down days of March seemed to have vanished into thin air.
Earnings Momentum
With the first month of 2020 earnings in the books, our Up/Down ratio starts Q1 at 0.72. This miserable figure was expected, but seeing it graphically, in the same ballpark as the great recession, reminds us of the gravity of the current economic situation. And the worst is yet to come!
Small Cap vs Mid Cap vs Large Cap
To look at this relationship another way, our trailing Small Cap P/E (13.9x) is in the 24th percentile of observations from 1983-present. Large Caps (20.8x) are in the 86th percentile.
Growth vs Value vs Cyclicals
Our Royal Blue Growth segment ended the month of April with a 0.3% YTD gain. That hardly seems fair given the economic calamity/uncertainty.
Additional Factors
April was a month of plummeting payrolls, eviscerated earnings, and crashing commodities—some of the worst data since the 1930s. It was also the best month of performance for the S&P 500 since January 1987 and it helped lower the YTD loss to the single digits. The punishment, it would seem, doesn’t fit the crime.