Research.LeutholdGroup

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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The Up/Down ratio reads 1.68—the highest “one-month” figure since way back in January 2022. Out of the depths of recessionary-like numbers just four quarters ago, the ratio continues to rise and is now approaching its 42-year average.

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After an initial post-election surge, hopes of a small-cap Trump bump seem to be fading. Since election day through the end of January, the Equal Weighted S&P 500 (+1.9%) has essentially matched the S&P 600 (+2.1%).

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Mid-Cap Growth (+6.4%) was the best performing style box of January. Since the end of September, MC Growth has outperformed MC Value, +15% versus +2%, respectively. Style leadership now seems to be evident in the Mid-Cap space but it’s still ambiguous among Large and Small Caps.

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On the last Monday in January, China’s newest and seemingly wildly efficient AI assistant, DeepSeek, begged the question, “Maybe we don’t need all of these chips to run AI?” That day, Nvidia and Broadcom each cratered -17%, the largest daily loss for both since the March 2020 panic. Recall that those two firms provided a little over a quarter of the S&P 500’s +25% return in 2024.

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The Up/Down ratio is 1.36—the best “final” quarterly figure we’ve logged for this vignette since Q3-21. After two years of readings that are normally associated with recessions, YOY EPS growth has certainly become more common thus far in 2024, with three quarters’ reports in the books.

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Our Ratio of Ratios ends 2024 in the middle of its range for the year (21-29% Small Cap discount). We enter another new year with this vignette advising that Small Caps can be purchased at a steep discount to Large Caps. Of course, this study said the same thing in January 2020, 2021, 2022, 2023, and 2024.

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Over the past two calendar years: Royal Blue Growth +73%, RB Value +29%. The P/E multiple for our RB Growth segment now sits a tick above is previous contemporary high of 45.0x (Q4-2021). In the aftermath of that high point three years ago, the P/E multiple collapsed to 30.1x over a span of three quarters.

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The Equal Weighted and Cap Weighted S&P 500 turned in eerily similar absolute returns for the past two years. The real shocker being the yawning, but nearly identical relative gap between the two from year to year (12.4% and 12.7%). The 29% performance void is the largest 23-month gap we can calculate since 1990. The next closest being April 1998 to March  2000 (27.9%).

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