Are Large-Cap Stocks Poised to Lead?

Are large-cap stocks poised to experience a long delayed renaissance?  In the chart below (which we update on our website each day for our subscribers), you can see a comparison of the cap weighted EPS yield to that of the median EPS yield.  In effect it is a good measure of the changing appetite for what investors have been paying the most for in their stock investments.

You can see in the chart that since the bottom of the bear market in 2009, larger-cap stocks have been totaly out of favor and smaller-cap stocks (mid-caps especially) have totally dominated.  For most seasons, we see this ratio remain around the level of 1, so the deviation is a reflection of many of those big stocks getting ignored or shunned due to their remaining exposure to the Financial Crisis.  That now, however, seems to be in a new trend of "returning to the mean."  The ratio peaked out coincident with that 2011 correction, and very slowly, we're seeing the ratio return to the more normal level.  In some ways, you can see this by the action of the bank stocks, but it is fairly general today that large-caps are outperforming the broad-based "median" stocks.

Don't get me wrong.  We still LOVE mid-cap stocks, since they tend to exhibit stronger earnings growth, but the disparity of the last few years has distorted that normal valuation, and it is time for some balancing out.

Don Hays

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