THE DIFFERENCE BETWEEN SMALL CAP AND LARGE CAP IS PRECEDENT SETTING

Bloomberg writes the NASDAQ 100 is “screamingly overvalued with its premium over fair value in excess of 50%” when the technology basket is viewed as a long duration bond. The analysis assumes that dividends that accrue from the NASDAQ 100 will increase at a compounded annual rate of 11%.
The brick and mortar S & P 500 is also overpriced but modestly so at 14%.
The NASDAQ 100 has almost doubled over the last 18 months. Its market capitalization is over $30 trillion, eclipsing the GDP of the economy which was $27.4 trillion at the end of the first quarter. Bloomberg writes even during the dot-com bubble, the NASDAQ 100’s market cap accounted for “only a paltry 37% of GDP.”
The biggest technology firms derive a considerable chunk of the earnings from global trade, the elevated market cap in relation to the size of the economy “nevertheless shows how frothy valuations are” according to the Newswire.
The NASDAQ 100 is trading on the unstated assumption that artificial intelligence will lead to a seismic shift in earnings growth on a scale technology stocks have never seen before.
As written many times, the markets can remain irrational far longer than only one can stay solvent but ultimately the markets will correct itself to the other extreme.
Speaking of extremes, the relative value being represented in today’s small-cap equity market versus large-cap is becoming more pronounced as the year continues. Breaking things down by market cap, companies less than $2B have a median return this year of -11% versus large caps over $17B north of +8%. The disparity in returns this wide between the two has only happened two other times: in the dot com era and at the bottom of COVID.
Smaller companies are generally affected more by higher interest rates than large, but with small caps now trading at only 1.2X price to sales versus threefold that in large, there is just relative value at this point between the two. Also, remember that small-cap companies tend to derive more revenue domestically than large, and with the US economy outperforming internationally and with rates set to begin to perhaps move lower, the macro backdrop is looking more constructive.
Commenting on Friday’s activity, NVDA fell as much as 5% on Friday, extending losses for a second consecutive session. The decline has wiped off more than $200 billion in market value. Before the two-day decline, the stock had risen 174% this year.
Some have stated the selloff is the result of triple witching hour where $5.5 trillion of options tied to indexes, stocks and exchange traded funds fall off the board.
Treasuries were relatively quiet.
The economic calendar is comprised of a sentiment indicator, housing statistics, personal spending and income, the monthly PCE data and inventories.
Last night the foreign markets were up. London was up 0.40%, Paris up 0.55% and Frankfurt up 0.46%. China was down 1.17, Japan up 0.54% and Hang Seng up 0.01%.
Futures are flat. The 10-year is off 1/32 to yield 4.27%.