The S&P 1500 Index gained 28.6% off a low, October 27, 2023, through March 28, 2024. The upward path was steady with low volatility. April, however, began with a 5.5% drop through April 19. Inflation, which had been declining since its peak June 2022, leveled off and even inched higher in early 2024. This stubborn inflation prompted investors to take the expectation for the Federal Reserve (Fed) to cut interest rates off the table. Some investors even feared the Fed might have to raise rates to get inflation down to its 2.0% goal. With potential Fed policy changing, the yield on the 10-year Treasury note increased from 4.2% to over 4.6%. This setting proved too much for stocks to overcome, thus the early April decline.
The index has rebounded off that April 19 low, but not enough to get back to its March 28 high. Contributing to that rebound has been some weak economic data leading some investors to believe inflation may return to its disinflation path. The hope for the Fed to cut interest rates also returned as the yield on the 10-year Treasury dropped to the 4.5% range.
The market drop in early April and the subsequent rebound have had very opposite sector themes. The worst three during the drop were Real Estate, Information Technology and Consumer Discretionary. Holding up the best, Energy was even positive, while the next three were the so-called, recession proof, defensive sectors of Utilities, Telecommunication Services and Consumer Staples. During the rebound in late April, Energy completely flipped and was the worst and only negative sector. Flipping the other direction, Information and Consumer Discretionary were the best two sectors during the rebound. Utilities was unusual as it was among the best during the drop, but also third best during the rebound.
Based on a variety of indicators, we expect small-cap stocks to lead the market sometime in the future. In fact, we believe this leadership change is long overdue. Perhaps it is beginning as small-cap indexes have beaten large cap indexes off the recent April 19 low. With a market V/P of 1.03 we believe stocks, on average, can grind higher.
When the Fed began tightening monetary policy, we believed the 2.0% inflation goal with less than historic average unemployment was possible. We still do. What has surprised us is the slow pace the Fed is taking to get there, when it had the tools to get there faster. With the belief the Fed will get to its goal eventually, we expect the yield on the 10-year Treasury to be lower over the next few years. The surge higher in April appears to be an overreaction to the stubborn inflation of early 2024.
As of May 6, 1037 of the companies in the S&P 1500 Index have reported first quarter earnings. On average, they are beating estimates (forecasts) by 8.51%. As a sector, Consumer Discretionary companies are surprising analysts the most, beating estimates by 16.45%. In addition, the earnings are, on average, 3.63% greater than the same quarter a year ago. We believe these earnings have contributed to the late April market rebound, yet there have been individual stocks that got pounded when they issued disappointing earnings guidance for the future. It appears investors are in the mood to bid stock prices higher for companies that are growing earnings.
The data quoted represents past performance, which is no guarantee of future results. Opinions and forecasts regarding sectors, industries, companies, countries and/or themes, and portfolio composition and holdings, are all subject to change at any time, based on market and other conditions, and should not be construed as a recommendation of any specific security, industry, or sector.
Investing in securities involves inherent risks, including the risk that you can lose the value of your investment. An investment concentrated in sectors and industries may involve greater risk and volatility than a more diversified investment. Investments in international securities may entail unique risks, including political, market, regulatory and currency risks. In general, there is less governmental supervision of foreign stock exchanges and securities brokers and issuers. Investing in fixed income securities such as bonds involves interest rate risk. When interest rates rise, the value of fixed income securities generally decreases.
Individual account holdings and composition may vary. Opinions and forecasts regarding sectors, industries, companies, countries and/or themes, and portfolio composition and holdings, are all subject to change at any time, based on market and other conditions, and should not be construed as a recommendation of any specific security, industry, or sector.
ICON’s value-based investing model is an analytical, quantitative approach to investing that employs various factors, including projected earnings growth estimates and bond yields, in an effort to determine whether securities are over- or underpriced relative to ICON’s estimates of their intrinsic value. ICON’s value approach involves forward-looking statements and assumptions based on judgments and projections that are neither predictive nor guarantees of future results. Value readings are contingent on several variables including, without limitation, earnings, growth estimates, interest rates and overall market conditions. Although valuation readings serve as guidelines for our investment decisions, we retain the discretion to buy and sell securities that fall beyond these guidelines as needed. Value investing involves risks and uncertainties and does not guarantee better performance or lower costs than other investment methodologies.
ICON’s value-to-price ratio is a ratio of the intrinsic value, as calculated using ICON’s proprietary valuation methodology, of a broad range of domestic and international securities within ICON’s system as compared to the current market price of those securities. According to our methodology, a V/P reading of 1.00 indicates stocks are priced at intrinsic value. We believe stocks with a V/P reading below 1.00 are overvalued while stocks with a V/P reading above 1.00 are undervalued. For example, we interpret a V/P reading of 1.15 to mean that for every $1.00 of market value, there is $1.15 of intrinsic value which has not yet been realized in the market price.
The unmanaged Standard & Poor’s Composite 1500 (S&P 1500) Index is a broad-based capitalization-weighted index comprising 1,500 stocks of Large-cap, Mid-cap, and Small-cap U.S. companies.
The 10-year yield is the benchmark 10-year yield to maturity reflected by the current issue 10 year U.S. Treasury note.
Sources: Bloomberg
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