![]() SP despite risks associated with smaller-cap stocks, diversified investors look to have exposure to small- and mid-caps based on the long-term performance record. In 2020, a relatively weak performance by the Russell 2000 Index has brought the measures more in line for the year-to-date. From 2003-2019, the Russell 2000 Index had climbed 282%, compared to an advance of 233% for the Russell 1000 Index. For another, prior to COVID-19, the long-term record favored small-caps over large-caps. For one thing, many smaller companies often are more focused on domestic operations and may not be exposed to the global economic uncertainty caused by the coronavirus. Large-caps have outperformed over the past 12 months, but small- and mid-caps may be in a better position to generate market-beating returns going forward. Several factors could improve valuations: a pullback in stock prices lower bond yields or better earnings, which we do expect to see in upcoming quarters. We'd feel better about the outlook for stocks if valuations were not so stretched. At current prices, the stock market is almost 25% above fair value, implying that investors are quite optimistic about equities in the coming months. ![]() That means we expect the S&P 500 to trade between 14% undervalued and 18% overvalued. Since 1960, on average, the index has traded at a tight 2% above fair value, but the standard deviation to the mean is 16%. We note that stocks rarely trade right at fair value. Our stock-market valuation model takes into account factors such as stock prices, five-year normalized earnings (three historical years, two forward-looking), GDP, inflation, and T-bond and T-bill yields. Stock prices, as expressed by the S&P 500, are near all-time highs and, on depressed earnings, are well above fair value, which our model pegs at closer to 3300 due to the weak pandemic-influenced EPS in 2020. Small-cap valuations remain depressed, and this group looks to offer value into 2022.ĪA,BABA,MDB,M,DKS,LTHM,BYND,ZM,ALB,UNFI,BBBYQ,PINS,MRNA,DVN,PANWĭaily Spotlight: Stocks Remain Above Fair Value As for small-caps, the promise of the vaccine is encouraging for these companies, which typically don't have the gilt-edged balance sheets of large-caps and are thus more dependent on a strong U.S. Investors seeking value are encouraged to focus on dividends and look for yields in the 3%-4% range. ![]() Will investors continue to favor value in 2021? Will small-caps reverse their recent weak trend? Given low interest rates, we expect growth stocks to resume their outperformance over time, and think this may be the one-in-five years that value leads. The average BUY-rated stock slipped 0.9%, while the average HOLD-rated stock declined 3.7%. ![]() The average stock in the Argus Universe of Coverage fell 1.7% during the quarter, and the median stock dropped 1.4%. Regarding sectors, our current Over-Weights are Energy, Healthcare, Industrials, and Materials.ĭKNG,NFLX,CTLT,CAH,DKS,LTHM,FSLR,BYND,ELAN,ETSY,FDX,PINS,CHTR,UBER,BIIBĭue to a difficult September, in which the S&P 500 fell 4.7%, 3Q21 was barely positive for stocks, with the major benchmark index increasing only 0.6%. Will investors continue to favor value in 4Q22? Will high inflation drive continued outperformance in Energy? Given interest rates that are on the rise, we are thinking 2022 may be the one-in-five years that value leads growth for the full year. The average BUY-rated stock dropped 5.0%, while the average HOLD-rated stock fell 7.1%. The average stock in the Argus Universe of Coverage declined 5.6% during the quarter, and the median stock declined 6.9%. The leading sectors were value-oriented, including Utilities, Energy, and Consumer Staples. Growth stocks have again been the weakest performers, as sectors such as Technology, Communication Services, and Consumer Discretionary have all lagged the major market indices. Year to date, the index is down 25% and in a bear market. Stocks fell sharply in 3Q 2022, with the S&P 500 down more than 5.2% for the period after a 9% decline in September. ![]()
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