Guests discuss positive outlook for risk assets and the flow of money into equities. They explore market timing impossibility and the influence of politics on investment decisions. Additionally, they talk about the impact of generative AI and the strength of the US dollar on the global economy. They also highlight the increasing interest in small cap and mid-cap stocks and share their cherished experiences living in university dorms.
Small caps and mid caps have been performing well due to expectations of a Federal Reserve interest rate cut, making them attractive to investors in terms of being cheap and under-owned.
The earnings gap between the top seven companies and the rest of the S&P 500 is narrowing, potentially impacting investor sentiment differently, with some viewing it as a dissipating tailwind and others remaining optimistic about the overall strength of the largest companies.
Deep dives
Small caps and mid caps outperform with Fed rate cuts
Small caps and mid caps have been performing well due to expectations of a Federal Reserve interest rate cut. These stocks were seen as cheap and under-owned, making them attractive to investors. Additionally, many small cap companies had better-than-expected balance sheets, reducing concerns about their financial health. However, for continued outperformance, something beyond an interest rate trade is needed.
Earnings growth expectations in the S&P 500
Consensus forecasts for earnings growth in the S&P 500 are optimistic, with expectations of around 11-12% growth in 2024. However, some skepticism exists regarding the lofty profit margin expansion expectations underlying these forecasts. Some investors question the feasibility of robust margin expansion across all sectors and believe that potential headwinds could limit earnings growth.
The outlook for the rest of the S&P 500 vs. the top seven
Analysts have observed that the earnings gap between the top seven companies and the rest of the S&P 500 is narrowing. While this gap still exists, the concentration of earnings in these top companies is diminishing. This trend may impact investor sentiment differently, with some viewing it as a tailwind dissipating and others remaining optimistic about the overall strength of the largest companies.
Investor interest in small caps and mid caps
Institutional investors are showing increased interest in small caps and mid caps after missing out on the end-of-year rally. Many investors are trying to catch up and find value in these stocks, leading to greater diversification and opportunities. However, concerns remain regarding the impact of ETFs and passive money on the volatility of these stocks.