Big tech values are under market scrutiny once more
Following the end of the Global Financial Crisis in 2009, the big cap segments of the US market fared exceptionally well over the protracted period of weak growth, minimal inflation, and low interest rates. Since February 2000, right before the Technology, Media and Telecoms (TMT) bubble burst the following month, the S&P 500 has been more concentrated in growth industries like IT than at any other time.
At the same time, the small and midcap company landscape in the US has maintained a high level of diversity. The market is challenging huge tech values once more.
In contrast to the weightings among small cap stocks, the significant concentration of major technology companies that is currently prevalent is comparable to the excesses we observed during the TMT boom. For several years up to 2007, American smaller firms outperformed larger corporations after the TMT bubble burst in 2000. This can be a sign of how the market will go in the future.
Smaller businesses outperformed larger ones during periods of increasing and decreasing interest rates on Fed funds and GDP. Due in part to the low starting point of valuations, small and midcap companies consistently outperformed large cap stocks over a time of shifting economic circumstances. Strong profits growth also contributed to the success of the strategy.
To encourage adopting this historical period as a reference, there are enough parallels between 2000–2007 and the present. Particularly, it seems like there is a recurring pattern of large caps concentrated on secular growth businesses selling at high values.
Since the end of January 2022, US small and midcap stocks have outperformed large caps, which is unheard of during a time when recessionary worries are prevalent. This is because small and midcap stocks are valued more affordably, and the domestic market-focused US small and midcaps provide diverse exposure to the overall economy.
Many of these businesses don't need to go outside for development, so they are somewhat protected from the escalating geopolitical tensions that are predicted to redefine international alliances, trade, and investment flows. Nevertheless, given the incentives provided by US authorities to manufacturers to "reshore" operations, a number of these businesses may directly benefit from a more regionalized global economy.
There are reasons to re-evaluate how investors are investing, but maintaining exposure to US stocks still represents a significant allocation in a diversified investment portfolio. Just investing in the S&P 500 would have been the wisest move for the previous five years, but things are starting to change.
Now there are strong reasons to increase investments in mid-sized and smaller US companies that are more attractively valued in light of the shifting global market.
