The Great Valuation Rotation Of The Roaring 2020s

For most of the time since the pandemic, large-cap stocks have outperformed their smaller counterparts in the US stock market. That is, the LargeCap S&P 500 index has outperformed the MidCap S&P 400 and SmallCap S&P 600, collectively the “SMidCaps.” That started to change late last year as investors increasingly concluded that the former's earnings outlook had become riskier and its valuations stretched. The SMidCaps’ earnings, which had been flat since late 2022, began moving higher late last year, with valuations that were relatively low. Thus began the Great Valuation Rotation of the Roaring 2020s.

Early last year, global investors also began rotating away from the US toward other markets. They did so because the US had outperformed the rest of the world since 2010, raising its market-capitalization share of the MSCI to a record 65% last year. So it was time to rebalance into stock markets with lower valuation multiples. This global rebalancing is likely to continue this year.