![Chart of the Week](/media/slemrxod/25072024-chart-of-the-week.jpg?width=700&quality=90&v=1dade745528f0d0)
What this chart shows
This chart shows the top 20 three-month periods of relative outperformance of the S&P 500 market capitalisation weighted index compared to the S&P 500 equally weighted index, along with the subsequent 1-year and 3-year relative returns. The market cap weighted index naturally apportions more significance to larger companies, whereas the equal weighted index treats each company with the same level of influence regardless of size. Significant outperformance of the market cap weighted index indicates that larger companies are driving market gains, while outperformance of the equal weighted index reflects broader market strength across the spectrum. The chart reveals a clear trend: whenever there is a significant three-month period of outperformance by the market cap weighted index, the equal weighted index then tends to outperform over the medium term. We can also observe that five of the 20 most significant periods of market cap weighted outperformance have occurred since 2023, driven primarily by enthusiasm for Artificial Intelligence (AI) and strong performance of tech mega caps. While future returns are uncertain, historical patterns suggest this bodes well for the equally weighted index and indicates potential for broader market participation in returns.
Why this is important
As mega cap stocks have continued to propel forwards leaving smaller companies behind, concentration in US equities has naturally increased. According to JP Morgan the top 10 stocks now account for a record 37% of the index. This makes it increasingly difficult for active managers to beat the benchmark, especially when the largest stocks continue to outperform. However, if the trend reverses, price movements can be sharp, as demonstrated by the recent rotation into small caps earlier this month. While the mega cap stocks leading the way today are undoubtedly well-run businesses generating vast amounts of free cash flow, unlike many of the speculative companies of the dot-com bubble, eventually diseconomies of scale kick in and restrain growth. This creates opportunities for companies from other sectors to gain traction and is why we have seen a consistent trend of subsequent equal-weight outperformance. A broader opportunity being favoured by the market is promising for active managers able to identify companies that have potentially been overlooked and offer attractive valuations.
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Chat of the Week - 21 Sep
This chart shows the amount raised in the top ten Initial Public Offerings (IPOs) in the US over the past five years and the share price performance since the date of their listing.
Source: Momentum Global Investment Management, Bloomberg Finance L.P. Data to 19 September 2023.
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This chart shows the difference in 30-day volatility between the iShares 20+ Year Treasury Bond ETF (Exchange Traded Fund) and the SPDR S&P 500 Trust ETF. ETFs are funds traded on stock exchanges and typically hold a range of holdings in a specific asset class with the aim of tracking their overall price movements.
Source: Momentum Global Investment Management, Bloomberg L.P. Data to 17 October 2023.