“
”Markets in Focus
Timely analysis of market moves and sectors of opportunity
An increasing number of S&P 500 Index constituents are beating the average year-to-date performance of the index overall, reflecting positive fundamentals and spanning a range of sectors and industries.
The current outperformance of capitalization-weighted indices has some similarities to price action from the dot-com era, but the quiet broadening in today’s market — driven by earnings growth and inflection points — was missing from the late 1990s.
All-time highs may suggest a market correction in the near term, but markets can correct through time as well as price.
When a single company is responsible for 25% of the S&P 500 Index’s year-to-date performance, it suggests ongoing problems with market gains concentrated in a small number of companies. However, Matt Orton, CFA, Chief Market Strategist at Raymond James Investment Management, says signs of increased market breadth continue to appear beneath the surface.
“It seems counterintuitive, but the problem with benchmarks right now is that they no longer reflect what’s actually happening to their average constituents,” Orton said.
About 34% of the S&P 500’s constituents are beating the year-to-date performance of the index overall, as of Feb. 23, 2024, according to Bloomberg. The percentage of companies outperforming the average by more than 10% has increased to 21%. “These companies all reflect positive fundamentals while spanning a range of sectors and industries,” Orton said. “The S&P 500’s fourth-quarter blended earnings per share (EPS) growth rate in 2023 now stands at 10.0%, well ahead of expectations.”
Mega-cap companies have contributed disproportionately to EPS growth, but Orton believes that some of the companies beating analysts’ expectations have done so without the support of the market’s enthusiasm for artificial intelligence (AI) and glucagon-like peptide (GLP-1) weight-loss drugs.
“Implied correlation across the constituents of the S&P 500 is at its lowest level in more than a decade, highlighting an environment where stocks are reacting to fundamentals,” Orton said. “The market might be stretched technically — having been up in 15 of the last 17 weeks — but I continue to urge investors not to fear a correction. Instead, they should have their shopping lists ready.” He believes that there are plenty of opportunities across the market for those who take the time to look.
Year-to-date performance (as of 2/22/24)
Source: Bloomberg, as of 2/22/24
Orton also noted that Japan’s Nikkei 225 Index eclipsed its all-time high from December 1989 on Thursday, which was also when the STOXX Europe 600 Index topped its previous record from January 2022.
“Japan has actually been the stealth outperformer this year amid all of the artificial intelligence hype here in the U.S.,” he said. The Nikkei 225 is up 16.8%, compared to the Nasdaq 100® Index gaining 7.1%. Orton believes that there is likely room for this outperformance to continue, because earnings per share expectations for Japanese companies remain below pre-pandemic levels and continue to rise. Corporate governance changes have also spurred buybacks and led to inflows from foreign investors.
Orton said that gains across Europe have been broad based, standing in stark contrast to the United States. Cyclical sectors, like industrials and financials, are Europe’s top-contributing sectors, and healthcare has also performed well. “I do worry about the economic backdrop and uninspiring earnings growth across the broader indices,” Orton said, “but this simply reflects the fact that selectivity has been and will continue to be critical to success.”
Orton said that investors should not overlook movements in interest rates. “The 10-year U.S. Treasury yield is up approximately 45 basis points since its most recent low in late December, although you certainly wouldn’t know it from looking at the equity market,” he said. “Market pricing of central bank rate cuts moved to three-month lows last week, and it looks like expectations are finally falling in line with U.S. Federal Reserve (Fed) guidance for 2024.”
“There are now around 88 basis points of cuts priced by year end for the fed funds rate, well below the 150 basis points of cuts priced at the start of the month,” Orton said. Since then, strong economic data led the market to revise its expectations. “This normalization hasn’t impacted the mega-caps, but we are starting to see some larger outflows from bond proxies.” Last week saw outflows from utilities, Orton said, but real estate has also experienced some withdrawals.
“If the upward trajectory of rates continued and the 10-year yield pushed to 4.50%, I would expect to see some near-term weakness in equities,” Orton said. “But I can’t imagine levels will persist there for too long.” Orton believes that investors should consider treating weakness as a buying opportunity in equities and that they should consider locking in generationally high yields in fixed income.
Orton believes that the market is overdue for some sort of correction in the near term, but he also believes that the overall backdrop remains optimistic. “Don’t forget that markets can correct through time as well as price, which means that we don’t need to see a meaningful drawdown to reset some of the overextended internals,” he said. “It’s easy to write off the market as being fueled by an AI bubble, but hopefully earnings for a few quarters will show that this mega-trend is durable.”
Orton is wary of arguments that point to similarities from the dot-com bubble, which can draw spurious conclusions based on past price action. “Sure, the outperformance of capitalization-weighted versus equal-weighted indices has some similarities to price action in the dot-com era,” Orton said. “But the quality of the companies driving the index price action is vastly different, as is the breadth underneath the surface.” Orton believes that the quiet broadening in the market, driven by earnings growth and inflection points, was missing from the late 1990s.
“Across the entire Russell 3000® Index, we’re seeing an increasing number of new four-week highs in sectors like energy, industrials, materials, and healthcare,” Orton said. “Last week, even with high-profile tech companies and the ‘everything AI’ rally capturing headlines, materials was the best-performing sector in the S&P 500 followed by consumer staples, healthcare, financials and industrials.” He added that the information technology sector actually underperformed the index’s average, because some companies didn’t deliver the perfect results demanded by recent price action and valuations.
“Don’t fear the all-time highs,” Orton said. “Instead, continue to play for a broadening market and use any near-term consolidation opportunistically.” Orton’s key investment themes are:
Continuing to position for an expansion of market breadth. “We’re seeing the market broaden every week,” he said, “and there remain some excellent opportunities for investors across sectors.” He believes that it’s unlikely to see equal-weighted indices catch up with the performance of their market-weighted peers, which is why he recommends remaining selective. “Earnings have been pretty good for the broader market, and we’re seeing outsized moves for companies that reported positive results and followed through with upbeat management commentary.”
Orton said that active management — as an alternative to indices that are not currently reflecting market performance — can be a way for investors to get exposure to high-quality businesses across a wide range of sectors and industries. “Even if increased breadth doesn’t manifest itself as we might expect, it doesn’t mean it’s not happening,” he said.
Considering U.S. small-cap equities as well as dividend growers, which posted meaningful underperformance in 2023. While the exact path and timing is debatable, Orton believes that rate cuts are on the horizon. “Small caps could benefit from a lower interest rate environment, and valuations remain at multi-decade lows while earnings are starting to inflect higher,” he said. “Investor positioning in small caps has been light, so even a slight rebalancing from the largest companies or cash could benefit smaller companies.” From a technical perspective, small caps are looking much more encouraging as well, he said, so some good earnings numbers and a tick up in flows could set the stage for a breakout.
Using downside opportunistically. With the S&P 500 approaching a new resistance level, Orton said he wouldn’t be surprised to see a bit of consolidation as earnings season winds down. “That said, I think that any consolidation presents a nice buying opportunity for investors,” he said. Cash getting redeployed by investors could provide a tangible boost to the market as short-term rates start to come down. Orton expects many yield-seeking investors will likely start to rotate back into a combination of fixed income and equity income assets, which could provide a catalyst for upside. He said he prefers dividend growers within the equity income space given their high-quality bias and the fact that inflation is still an important consideration.
The U.S. Personal Consumption Expenditures (PCE) Price Index data, published on Thursday, will be a major focus this week. It should provide inflation data that offers insights into the possible timing of rate cuts.
Economic data on new home sales, durable orders, and construction prices.
A busy roster of central bank policymakers will likely influence the rates debate.
Risk Information:
Investing involves risk, including risk of loss.
Diversification does not ensure a profit or guarantee against loss.
Disclosures:
Index or benchmark performance presented in this document does not reflect the deduction of advisory fees, transaction charges, or other expenses, which would reduce performance. Indexes are unmanaged. It is not possible to invest directly in an index. Any investor who attempts to mimic the performance of an index would incur fees and expenses that would reduce return.
This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature, or other purpose in any jurisdiction, nor is it a commitment from Raymond James Investment Management or any of its affiliates to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical, and for illustration purposes only. This material does not contain sufficient information to support an investment decision, and you should not rely on it in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and make their own determinations together with their own professionals in those fields. Any forecasts, figures, opinions, or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions, and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements, and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.
The views and opinions expressed are not necessarily those of the broker/dealer or any affiliates. Nothing discussed or suggested should be construed as permission to supersede or circumvent any broker/dealer policies, procedures, rules, and guidelines.
Sector investments are companies engaged in business related to a specific sector. They are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification.
Investing in small cap stocks generally involves greater risks, and therefore, may not be appropriate for every investor. The prices of small company stocks may be subject to more volatility than those of large company stocks.
International investing presents specific risks, such as currency fluctuations, differences in financial accounting standards, and potential political and economic instability. These risks are further accentuated in emerging market countries where risks can also include possible economic dependency on revenues from particular commodities or on international aid or development assistance, currency transfer restrictions, and liquidity risks related to lower trading volumes.
Definitions
Basis points (bps) are measurements used in discussions of interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01%.
Bond proxies are considered to be stocks or other non-bond investments that seek to offer returns that are similar to bonds.
Blended earnings results combine actual results for companies that have reported earnings and estimated results for companies that have yet to report.
Breadth describes the relationship between the median and the mean of a market index. When a few data outliers result in a mean that is substantially larger (or smaller) than the median of the full data set, then the performance of the entire index is being driven by a “narrow” selection of companies. An index supported by “broad” market movements is one where the median is closer to the mean.
Consolidation in the technical analysis of market dynamics refers to an asset trading within a well-defined pattern of trading levels.
Cyclical sectors consist of companies whose prices are influenced by macroeconomic changes in the economy. They are known for following economic conditions as they cycle through expansion, peak, recession, and recovery.
The dot-com bubble, which developed between 1995 and early 2000, involved a rapid, unsustainable increase in the share prices of businesses that were closely associated with the internet.
The federal funds rate, known as the fed funds rate, is the target interest rate set by the Federal Open Market Committee of the U.S. Federal Reserve. The target is the Fed’s suggested rate for commercial banks to borrow and lend their excess reserves to each other overnight.
The Federal Open Market Committee (FOMC) consists of 12 members: the seven members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and four of the remaining 11 Reserve Bank presidents, who serve one-year terms on a rotating basis. The FOMC holds eight regularly scheduled meetings per year at which it reviews economic and financial conditions, determines the appropriate stance of monetary policy, and assesses the risks to its long-run goals of price stability and sustainable economic growth.
Fund flow is the net of all cash inflows and outflows into and out of a particular financial asset, sector, or index. It typically is measured on a quarterly or monthly basis.
Investors and others look at the direction of fund flows for indications about the health of specific securities and sectors or the overall market.
Glucagon-like peptide (GLP-1) weight-loss drugs comprise a class of type 2 diabetes drugs that improve blood sugar control and may also lead to weight loss. The drugs mimic the action of a hormone called glucagon-like peptide 1 by stimulating the body to produce more insulin when blood sugar levels start to rise after someone eats. The additional insulin helps lower blood sugar levels, which helps in controlling type 2 diabetes. How GLP-1 agonists lead to weight loss is less clear.
Market capitalization, or market cap, refers to the total dollar market value of a company’s outstanding shares of stock.
Market of stocks is a term market participants use when referring to the diversity of technical or other characteristics that may exist at any given time within the overall stock market. For example, the stock market as a whole may rise or fall on the fortunes of a small number of very large and thus very influential stocks. But within the broader market of stocks, there can be many companies with performance, risk, or opportunities that vary significantly from what market participants may find at the index level.
Mega-cap stocks are the largest publicly traded companies as measured by market capitalization. Generally, this refers to companies with market capitalizations over $200 billion.
Positioning refers to assessments of whether professional investors are, on the whole, bullish or bearing on a particular security, industry, sector, market capitalization or other area of the market, as reflected by the extent to which they are invested in the area of the market in question.
The Personal Consumption Expenditures (PCE) Price Index, excluding food and energy, known as the core PCE index, is a measure of the prices that people living in the United States, or those buying on their behalf, pay for goods and services. The PCE price index, released monthly by the U.S. Department of Commerce Bureau of Economic Analysis, is known for capturing inflation or deflation across a wide range of consumer expenses and reflecting changes in consumer behavior.
Implied correlation is a measure of how closely the components of a given index track against one another.
A resistance level represents a price point that an asset has had trouble exceeding in the time period being considered.
Index
The Nasdaq 100 Index consists of the 100 largest non-financial stocks listed on the Nasdaq stock market.
The Nikkei 225 Index measures 225 top-rated Japanese companies listed in the First Section of the Tokyo Stock Exchange.
The Russell 3000® Index measures the performance of the 3,000 largest U.S.-traded stocks, which represent about 96% of the total market capitalization of all U.S. incorporated equity securities.
The S&P 500 Index measures change in stock market conditions based on the average performance of 500 widely held common stocks. It is a market-weighted index calculated on a total return basis with dividend reinvested. The S&P 500 represents approximately 80% of the investable U.S. equity market.
The S&P 500® Equal Weight Index is the equal-weight version of the S&P 500. It includes the same constituents as the capitalization-weighted S&P 500, but each company in the S&P 500 Equal Weight Index is allocated a fixed weight, or 0.2% of the index total at each quarterly rebalance.
The STOXX Europe 600 Index measures the 600 largest European stocks measured by free-float market cap.
London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). ©LSE Group 2024. FTSE Russell is a trading name of certain of the LSE Group companies. Russell® is a trademark of the relevant LSE Group companies and is used by any other LSE Group company under license. All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote, sponsor, or endorse the content of this communication.
M-505310 Exp. 6/26/2024
Despite the concentration at the top of the S&P 500 Index, a growing number of stocks outside of the Magnificent Seven are posting vigorous returns across a range of sectors.
Traditional valuation metrics are not as useful as they once were. That’s because the U.S. economy and stock market are both much more geared for growth than they were before the Global Financial Crisis. So claims that the market is overvalued by those metrics deserve some skepticism.
Both trends underscore the importance of being selective in stock investing.
No matter where you turn, from valuations to market breadth to interest rates, caution signs abound. And no wonder, said Matt Orton, CFA, Chief Market Strategist at Raymond James Investment Management, when you look at some of the market anomalies that just seem to keep getting more extreme.
“That said,” he adds, “I believe the market backdrop is still very constructive. I wouldn’t be surprised to see some sort of consolidation or at least range-bound trading in the near term. Breadth is nowhere near as bad as people would make it seem in the overall market. And considering all the idiosyncrasies we find in the market right now, it matters what you own. Remaining selective is key.”
Enthusiasm around artificial intelligence (AI) and the strong top-line growth we’re seeing among semiconductor and software companies has led to some outsized price gains and consequently valuation inflation. Increasing concentration at the top of the market has also significantly narrowed the top contributors to market performance in broader indices like the S&P 500 Index, leading to extreme divergences between the index and the average stock. And these seemingly higher-duration equities no longer react to interest rates – if rates go down, the AI complex goes up, and if rates go up, the AI complex still goes up.
“All these criticisms of the current market are absolutely valid, and they present a number of risks that average index investors ignore at their peril,” Orton said. “But I would argue that the market of stocks is actually meaningfully healthier than these anomalies would have us believe.”
We’re finally starting to see some positives down the market capitalization spectrum while more parts of the market like healthcare, industrials and financials remain on solid footing, Orton said. Beneath the surface, according to Bloomberg:
More than 55% of stocks in the S&P 500 are up for the year, as of Feb. 16, 2024;
About a third are beating the index as a whole; and
80 companies are up more than 10%, largely driven by positive fundamental reactions to earnings across a variety of sectors.
The market is certainly stretched from a positioning and momentum perspective, and seasonals are set to become a bit more challenging, but Orton continues to advocate for using downside opportunistically.
While the impact of the Magnificent Seven has diminished somewhat with weaker performance from two of its members, the top five companies in the S&P 500 are still contributing about two-thirds of year-to-date gains. As a result, the ratio of the cap-weighted S&P 500 to the S&P 500® Equal Weighted Index continues to push into the most extreme territory since the Global Financial Crisis. Orton acknowledged some of the extreme moves this year in heavily weighted names, but noted that a growing number of stocks are doing well, supported by strong earnings and fundamental outlooks. In fact, he said, there’s been a steady improvement in the absolute performance of the average stock over the past few weeks. Unfortunately, he said, anomalies with respect to index weighting mask this when just looking at the surface. More sectors and industries look to be approaching inflection points in their earnings cycles, which could provide further support throughout 2024, Orton said. While the level of index concentration certainly poses a risk should all of these companies roll over, he would argue the likelihood of that is very low.
“Sure, positioning is stretched and there is absolutely a risk of near-term consolidation,” he said. “In fact, I expect some choppiness ahead should rates press higher, but frankly I believe that would be healthy and likely short-lived.”
Most of the mega-caps are supported by a strong fundamental demand backdrop coupled with the ability to further reduce costs and drive efficiency. Also, outside of two of the largest stocks, the year-to-date gains aren’t that extreme on an absolute basis. Orton believes there are opportunities for investors who are willing to be selective. He added that he believes lagging defensive equity sectors and small caps still offer diversification appeal. He said small and mid-cap biotechnology looks to be on the verge of a breakout, driven by the cash windfall in anti-obesity drugs, while the rest of the healthcare sector is reporting earnings well ahead of estimates. Even energy might be starting to show some signs of life outside of the refiners.
“At the end of the day, the current manifestation of market narrowness isn’t something by itself I’m too concerned about,” he said.
It’s also important to reframe the discussion around valuation, Orton said. The backdrop is an overbought equity market with many sentiment measures at bullish extremes after the violent “Fed pivot” rally that began with U.S. Federal Reserve Chair Jerome Powell’s dovish comments two months ago. The rising tide lifted all boats, but that has been normalizing, which is perhaps one of the reasons that breadth took a hit at the start of this year. Valuations, however, haven’t taken much of a breather with the S&P 500 trading at 24.0 times its 12-month forward price to earnings (P/E) ratio as of Feb. 9, 2024. That’s back toward the peak of 2021 on a forward multiple basis, but it’s worth pointing out that the market of stocks (i.e., the equal-weighted S&P 500) is meaningfully cheaper at 19.2 times forward P/E as of the same date. Orton said he suspects that valuations will flatline even as the market moves higher as earnings revisions pick up for the broader market and the inflection continues across sectors outside of information technology and communication services.
“All of that said, I think it’s important to push back against the notion that the market is expensive just because the long-term medians or averages tell us so,” Orton said. “I am prepared to argue that the market is so different today that there isn’t much value in using these longer-term metrics.”
This is largely because both the U.S. economy and the stock market have become much “growthier” in nature since the Global Financial Crisis, Orton said. Before the crisis, sectors like financials and energy were among the largest weights in the S&P 500. That is starkly different from today. And he noted that growthier companies command a higher multiple.
“This isn’t to say that the market might be stretched right now,” he said, “but that’s not just because a historical multiple tells us so.”
Increased concentration skews valuation at the index level
Source: Bloomberg, as of 2/9/24
Want to own the index? Get ready to pay up for growth
S&P 500, last 20 years
* Growth sectors are information technology, communication services and consumer discretionary.
Source: Bloomberg, as of 2/13/24
U.S. macroeconomic data in January was choppy. Strong payrolls and upward surprises in Consumer Price Index (CPI) inflation data point to a strong economy. But weakness in retail sales and industrial production suggest the economy might be slowing.
“What I can say with confidence is that I believe none of the data point to recession, and it all gives the Fed some flexibility to cut interest rates perhaps even fewer times than it has forecast,” Orton said. “That said, this market appears OK with fewer cuts provided that growth remains robust. With this being my base case, I continue to expect to see the broadening of the market play out.” In that environment, Orton’s playbook includes:
Positioning for an expansion of market breadth. One problem with the “everything” rally at the end of last year was that many stocks that had no business rallying based on fundamentals were bid up, he said. That is being unwound now, particularly with the current higher interest rates posing headwinds to lower-quality businesses. But earnings have been pretty good for the broader market and we’re seeing outsized moves for companies that have reported positive results and followed through with upbeat management commentary. Orton said this reflects the opportunities that exist across the market of stocks and highlights the value of being selective.
Considering U.S. small-cap equities as well as dividend growers, which both posted meaningful underperformance in 2023. While the exact path and timing is debatable, it’s clear that rate cuts are on the horizon. Small caps should benefit from a lower rate environment, he said, and valuations remain near multi-decade lows while earnings are starting to inflect higher.
Investor positioning in small caps started the year on the light side, so even a slight rebalancing from the largest companies or cash could benefit smaller companies. From a technical perspective, small caps look more encouraging as well, he said, so some good earnings and a tick up in flows could set the stage for a breakout.
Using downside opportunistically. With the S&P 500 approaching a new resistance level, Orton said he wouldn’t be surprised to see a bit of consolidation as earnings season winds down. “That said, I believe any consolidation presents a nice buying opportunity for investors,” he said. A redeployment of cash by investors could provide a tangible boost to the market as short-term rates start to come down. He expects many yield-seeking investors will likely start to rotate back into a combination of fixed income and equity income assets, providing a catalyst for upside. He said he prefers dividend growers within the equity income space given their high-quality bias and the fact that inflation remains an important consideration.
After last week’s conflicting reports on gross domestic product, jobs, retail sales, and inflation, this week brings:
February’s preliminary S&P Global Purchasing Managers’ Index™ (PMI) readings across Europe on Thursday.
January meeting minutes for the Federal Open Market Committee (FOMC) on Wednesday and the European Central Bank on Thursday. The FOMC minutes could show how much support Fed Chair Powell has to initiate the cutting cycle.
Fed Vice Chair Philip Jefferson is scheduled to speak at 10 a.m. Thursday.
Risk Information:
Investing involves risk, including risk of loss.
Diversification does not ensure a profit or guarantee against loss.
Disclosures:
Index or benchmark performance presented in this document does not reflect the deduction of advisory fees, transaction charges, or other expenses, which would reduce performance. Indexes are unmanaged. It is not possible to invest directly in an index. Any investor who attempts to mimic the performance of an index would incur fees and expenses that would reduce return.
This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature, or other purpose in any jurisdiction, nor is it a commitment from Raymond James Investment Management or any of its affiliates to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical, and for illustration purposes only. This material does not contain sufficient information to support an investment decision, and you should not rely on it in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and make their own determinations together with their own professionals in those fields. Any forecasts, figures, opinions, or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions, and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements, and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.
The views and opinions expressed are not necessarily those of the broker/dealer or any affiliates. Nothing discussed or suggested should be construed as permission to supersede or circumvent any broker/dealer policies, procedures, rules, and guidelines.
Sector investments are companies engaged in business related to a specific sector. They are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification.
Investing in small cap stocks generally involves greater risks, and therefore, may not be appropriate for every investor. The prices of small company stocks may be subject to more volatility than those of large company stocks.
International investing presents specific risks, such as currency fluctuations, differences in financial accounting standards, and potential political and economic instability. These risks are further accentuated in emerging market countries where risks can also include possible economic dependency on revenues from particular commodities or on international aid or development assistance, currency transfer restrictions, and liquidity risks related to lower trading volumes.
Definitions
Breadth describes the relationship between the median and the mean of a market index. When a few data outliers result in a mean that is substantially larger (or smaller) than the median of the full data set, then the performance of the entire index is being driven by a “narrow” selection of companies. An index supported by “broad” market movements is one where the median is closer to the mean.
Consolidation is a term used in technical analysis to describe when stocks reverse previous gains (or losses) to stay within well-defined trading levels.
The U.S. Consumer Price Index (CPI) measures the change in prices paid by consumers for goods and services. The U.S. Bureau of Labor Statistics bases the index on prices of food, clothing, shelter, fuels, transportation, doctors’ and dentists’ services, drugs, and other goods and services that people buy for day-to-day living. Prices are collected each month in 75 urban areas across the country from about 6,000 households and 22,000 retailers.
Defensive stocks provide consistent dividends and stable earnings regardless of whether the overall stock market is rising or falling. Companies with shares considered to be defensive tend to have a constant demand for their products or services and thus their operations are more stable during different phases of the business cycle.
Dispersion refers to the range of outcomes in different areas of a financial market or to the potential outcomes of investments based on historical volatility or returns.
Dovish, hawkish and centrist are terms used to describe the monetary policy preferences of central bankers and others. Doves tend to support maintaining lower interest rates, often in support of stimulating job growth and the economy more generally. Hawks prioritize controlling inflation and may favor raising interest rates to reduce it or keep it in check. Centrists tend to occupy the middle of the continuum between tight (hawkish) and loose (dovish) monetary policy.
Equity duration is the cash-flow weighted average time at which investors can expect to receive the cash flows from their investment in a company’s stock. Long-duration stocks include fast-growing technology companies, including those that may not pay any dividends in their early years, while short-duration stocks tend to be more mature companies with higher ratios to dividend to price.
The Federal Open Market Committee (FOMC) consists of 12 members: the seven members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and four of the remaining 11 Reserve Bank presidents, who serve one-year terms on a rotating basis. The FOMC holds eight regularly scheduled meetings per year at which it reviews economic and financial conditions, determines the appropriate stance of monetary policy, and assesses the risks to its long-run goals of price stability and sustainable economic growth.
Forward price-to-earnings (forward P/E) is a version of the ratio of price to earnings that uses forecasted earnings for the P/E calculation. The earnings used in this ratio are an estimate and therefore are not as reliable as current or historical earnings data. Price-to-earnings (P/E) ratios measure a company’s current share price relative to its earnings per share. The ratio is used to help assess a company’s value and is sometimes referred to as the price multiple or earnings multiple.
Fund flow is the net of all cash inflows and outflows into and out of a particular financial asset, sector, or index. It typically is measured on a quarterly or monthly basis.
Investors and others look at the direction of fund flows for indications about the health of specific securities and sectors or the overall market.
Growth investing is a stock-buying strategy that focuses on companies expected to grow at an above-average rate compared to their industry or the market.
The “Magnificent Seven” refers to the seven largest stocks by market capitalization in the S&P 500 Index, as of Dec. 29, 2023. Collectively they made up more than 25% of the market capitalization of the entire index. They are Alphabet, Amazon.com, Apple, Meta Platforms, Microsoft, NVIDIA and Tesla.
Market capitalization, or market cap, refers to the total dollar market value of a company’s outstanding shares of stock.
Market of stocks is a term market participants use when referring to the diversity of technical or other characteristics that may exist at any given time within the overall stock market. For example, the stock market as a whole may rise or fall on the fortunes of a small number of very large and thus very influential stocks. But within the broader market of stocks, there can be many companies with performance, risk, or opportunities that vary significantly from what market participants may find at the index level.
Mega-cap stocks are the largest publicly traded companies as measured by market capitalization. Generally, this refers to companies with market capitalizations over $200 billion.
Momentum investing is a strategy that aims to capitalize on the continuance of an existing market trend. It is a trading strategy in which investors buy securities that are already rising and look to sell them when they look to have peaked. It entails taking long positions on financial instruments with prices trending up and short positions on instruments with prices trending down.
A multiple, sometimes referred to as the price multiple or earnings multiple, is a measure of a company’s value based on the ratio of its current share price to its earnings per share. This ratio is known as the price-to-earnings ratio, or P/E.
Overbought is a term used to describe a security or group of securities believed to be trading at a level above its or their intrinsic or fair value.
Positioning, or investor positioning, refers to assessments of whether professional investors are, on the whole, bullish or bearing on a particular security, industry, sector, market capitalization or other area of the market, as reflected by the extent to which they are invested in the area of the market in question.
Rangebound is a condition where the value of a security keeps vacillating between the low and high ends of a narrow range. For example, if the 10-year Treasury yield repeatedly vacillated between 3.75% and 4.25%, it would be described as “rangebound.”
A resistance level represents a price point that an asset has had trouble exceeding in the time period being considered.
Seasonals or seasonality refer to predictable changes that occur over a one-year period in a business, market, market sector, or economy based on the season, including calendar or commercial seasons.
S&P Global Purchasing Managers’ Index™ (PMI) surveys provide monthly indicators that track economic trends in more than 40 countries and regions, including the Eurozone.
Underweight describes a portfolio position in an industry sector or some other category that is less than the corresponding weight level in a benchmark portfolio.
Index
The S&P 500 Index measures change in stock market conditions based on the average performance of 500 widely held common stocks. It is a market-weighted index calculated on a total return basis with dividend reinvested. The S&P 500 represents approximately 80% of the investable U.S. equity market.
The S&P 500® Equal Weight Index is the equal-weight version of the S&P 500. It includes the same constituents as the capitalization-weighted S&P 500, but each company in the S&P 500 Equal Weight Index is allocated a fixed weight, or 0.2% of the index total at each quarterly rebalance.
M-502597 Exp. 6/20/2024
