“We are not excited about owning the S&P 500 at market weight. It is dominated today by seven stocks that are correlated with each other, and they are all super expensive as a starting point."
— Lisa Shalett, CIO Morgan Stanley Wealth Management
A year dominated by mega cap tech stocks ended with a ferocious rally in small value. Is this the big turn we’ve been waiting for?
In late October, after investors embraced a Goldilocks narrative that inflation isn’t too hot, the economy isn’t too cold, and the Federal Reserve will stick a “soft landing,” the Russell 2000® Index surged, outpacing the gains for the S&P 500 Index. That performance also beat the Magnificent 7, the giant tech stocks that accounted for much of the broad market’s gains in 2023. Better still, small value has been beating growth throughout this stretch.
For the full quarter, the Russell 2000® Value Index returned over 13%, ahead of the gains for the Russell 2000® Growth Index and S&P 500.
It may be too soon to tell, whether this is the official start of market leadership broadening out and pivoting to areas that have been left behind. But here’s what we know:
- After a year dominated by mega-cap tech, the area we focus on is long overdue for a catch up.
- With large caps trading at around 18 times 2024 earnings, there seems to be less risk and more opportunity in the small and mid-cap spaces.
- The surprising rally for small value demonstrates the risk of blindly following conventional wisdom, including the one that says Federal Reserve officials will start cutting rates aggressively in 2024, justifying lofty multiples for large-cap growth.
There’s something else we know: The impact of monetary policy tends to come with a lag, so it would be risky to discount the possibility of surprises in the coming months that might complicate this script.