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Market Updates

April 25, 2023

Market Snapshot: Mega Cap Rally Drives Valuation Premium vs. Midcaps to Near Cycle High


  • The S&P 500 rally for Q1 2023 was predominantly focused on the largest weights of the index (Apple Inc., Microsoft Corp., Alphabet Inc., Inc., NVIDIA Corporation and Tesla, Inc) with these 5 names generating 75% of the quarterly return. This rally pushed Price/Earnings (NTM) for the S&P 500 to 18.6 as of quarter end, up from 17.1 at year end. This compares to the S&P 400 Midcap that has Price/Earnings (NTM) currently trading at 13.9.
  • The S&P Midcap P/E of 13.9 ranks in the bottom decile (9th percentile) since 1993 while the S&P 500 P/E of 18.6 ranks in the 76th percentile. The relative premium of large caps versus mid-caps now sits at 33%, 95th percentile of historical readings since 1993. While this is down from the 41% record high in June 2022, this premium is well above the median discount of -3% since 1993. A reversion to median would imply that mid-caps outperform large caps by about 3.6% per year for the next ten years.
  • We continue to believe market concentration in large cap indices remains a risk to passive investing. From an active investor perspective, we believe the relative valuation of other areas of the market to the mega cap stocks continues to offer opportunities.

Views expressed include opinions of the portfolio managers as of April 30, 2023, based on the facts then available to them. All facts are gathered in good faith from public sources, but accuracy is not guaranteed. Nothing herein is intended as a recommendation of any security, sector or product. Returns represent past performance and are not guarantees of future results. Actual performance in a given account may be lower or higher than what is set forth above. All investment has risk, including risk of loss. Designed for professional and adviser use.