From a valuation perspective this market is divided into the Bigs (top 100) and the Big-Nots (everyone else).
If you’re big you attract all the flows, have a much lower cost of capital (aka very high valuations), you suck up a lot of small companies through M&A, and to be fair if you got big in the first place you probably have pretty decent earnings and growth.
If you’re small you’re off the radar, under-covered, under-valued, under-performing and probably underestimated.
And even if you’re large —but not the largest, you still trade at a discount to the largest companies.
As alluded, this is partly selection effects (successful companies get big), but also reinforced by the relentless rise of passive/index investing.
But where things are sitting now is what you would call extreme. And whenever you see an extreme in markets you want to pay attention because that’s where some of the biggest risks and opportunities can be found.
This chart highlights the risks on the one hand with mega caps as a group trading at the most expensive levels since the dot com bubble. Even if it is different this time (and it definitely is in many respects), this presents a very high bar and shows investor confidence is extremely high (investors expect the top 100 to continue to grow at an aggressive clip).
It also shows the opportunities on the other hand, with SMID caps trading at cheap valuations vs recent history and cheap relative valuations vs large and mega caps.
The interesting thing is we are starting to see early signs of a shift in relative performance — after lagging long behind, small caps are starting to play catch-up with the Russell 2000 making new all-time highs this week, while MAG-7 peaked in mid-May and are just treading water at the moment.
As discussed in the latest Weekly S&P500 $S&P 500(.SPX)$ ChartStorm, I reckon this could be the start of a bull market broadening and bullish rotation…
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