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Key Takeaways
- The equal-weighted S&P 500 currently trades at a near-record discount to the starndard capitalization-weighted version of the index, according to Bank of America Securities.
- The “S&P 493″—the benchmark S&P 500 excluding the Magnificent Seven—was, as of Wednesday, on track to make the second quarter its first period of earnings growth since 2022.
- Small-caps, which surged last month as market participants looked ahead to interest-rate cuts, are set to report a sixth consecutive quarter of shrinking earnings.
After July’s stumble by the Magnificent Seven mega-capitalization tech stocks that accounted for most of the market’s first-half gains, investors may be itching to branch out from the group. For that, they may want to consider the “S&P 493,” according to Bank of America Securities.
That in effect means the equal-weighted S&P 500, in which the Magnificent Seven have much less influence over the index. Measured that way, the index trades near its steepest discount relative to the capitalization-weighted index since the height of the tech bubble in the early 2000s.
The equal-weighted index’s forward price-to-earnings ratio is about 80% that of the cap-weighted standard, according to a Wednesday BofA research note. The discount would be even larger if tech mega-caps hadn’t led the market pullback throughout July and early August.
The gap is in part due to rebounding corporate earnings. Excluding the Mag Seven, the S&P 500 was, as of Wednesday, on track to grow second-quarter earnings by 8%, its first quarter of growth since 2022.
Earnings Growth Powers Index’s Return
Earnings growth accounted for about 10 percentage points of the S&P 500’s 12% year-to-date return, according to BofA analysts in the Wednesday note. Multiple expansion, by their estimate, has added just 2 percentage points.
Meanwhile, the small-cap S&P 600 hasn’t grown earnings since the end of 2022 and isn’t expected to do so this quarter. Plus, the analysts added, “rising recession concerns hit small-caps harder if history is a guide.”
The Russell 2000 earlier this month surged 10% in a week after a soft inflation report boosted confidence the Federal Reserve would cut interest rates in the fall, sparking a rotation out of mega-cap tech stocks into rate-sensitive small caps. Those gains were erased in early August when soft labor-market data raised concerns about the health of the U.S. economy.