Search Results

Typically, earnings growth is more important than sales growth for stock performance. However, as the chart illustrates, this was not the case in 2024. When the market rebounded in early August after the decline in July, sales growth became more significant than earnings growth for stocks in the S&P 500. Since the beginning of August, the long-short factor return for sales growth of S&P 500 stocks, measured as sector-neutral, has increased by 10%, better than the return from momentum, which rose by 8.5%. In contrast, the earnings growth factor return has declined by 3% since the beginning of August.

Since early September, small-cap stocks have outperformed large-cap stocks. Investors' recent enthusiasm for small caps is evident in their positive view of high capital spending. The chart's red line highlights a consistent positive return for being long stocks with high Capex-to-Assets ratios and short stocks with low ratios during this period, namely a consistently positive Capex-to-Assets factor return since early September. The small-cap rally reflects an assumption that the risks associated with high capital spending are worth taking--a risky bet.

The stock market reacted enthusiastically to the election results, and momentum played a significant role in almost every market segment.

It is surprising and potentially alarming that financial leverage has been a powerful driver of stock returns during the market rally over the past year. For stocks in the S&P 500, the sector-neutral long-short factor return for debt/equity was 12% since October 31, 2023, with an impressive 2.7 information ratio. In contrast, the ROE and price momentum factors returned 7.7% over this period, with a 1.3 information ratio for ROE and a 0.6 information ratio for momentum.

In a recent post, I highlighted an example of what can be missed when using a passive index approach to value. In the consumer staples sector of the S&P500, the long-short returns for Earnings/Price and Sales/Price have diverged massively since the end of March. The divergence happens because of industry effects within the sector. The Earnings/Price strategy is long food and tobacco production, while short food and staples retail. At the same time, the Sales/Price strategy is long food and staples retail, while short household products and food and tobacco production.

It is not uncommon for different value metrics to produce different investment outcomes, so value indices and ETFs generally blend value metrics. The selected metrics and their weightings produce a particular impression of value investing performance. This selection feature differs from cap-weighted indices, where only one metric, cap weight, is considered. What has been happening in the consumer staples sector of the S&P500 has been extreme, highlighting what a value blend masks.

The sales/employee ratio should be a good measure of employee productivity. However, it varies considerably across market sectors, much higher in capital-intensive industries such as energy and utilities and much lower in more labor-intensive sectors such as industrials and consumer discretionary. The sales/employee ratio has been most effective as a source of investment return in consumer discretionary, a sector that includes retail, hospitality, autos, and entertainment, which rely on large numbers of employees.

In his March State of the Union address, President Biden proposed raising the excise tax on stock buybacks from 1% to 4% to discourage companies from engaging in stock repurchases. On April 12, the Department of Treasury and the IRS followed up with proposed regulations on stock buybacks. Kamala Harris endorses Biden’s plan to quadruple the tax. Is there evidence that the proposed tax has affected buyback-related stock performance? If there was a tax effect, would ongoing stock performance reflect the odds of this tax becoming enacted, reflecting the market’s view of whether Harris or Trump will be the next president?

Momentum was a driving force for the market in 2024 until momentum peaked on July 9. Momentum resumed its upward climb at the end of July, and the question now is whether momentum will continue to be a force, perhaps driving the market upward as it did before the summer. The problem with expecting sustained momentum strength is that reversal has consistently performed well since mid-June. Momentum means stocks are trending; reversal means stocks aren't trending. They shouldn't both continue to work well.

A distinction of tech companies is that they are sources of innovation and growth. In addition, large-cap tech companies often rank among the highest quality in the market when evaluated by typical measures such as Return on Equity (ROE). That is why the tech weight in the quality ETF QUAL has grown to 43%. Furthermore, ROE has been the most effective driver of long-short stock returns within the tech sector of the S&P500, more than momentum or size.

Two notable features of the 2024 market rally were the power of momentum and the dominance of large-cap stocks. The market peaked on July 16, but momentum and size peaked a week earlier, on July 9. The market now looks like it bottomed on August 5. That’s about a week after momentum and size bottomed on July 30.

The public was introduced to Open AI's ChatGPT on November 30, 2022. It took a month for the potential of this breakthrough to electrify the performance of tech stocks. The tech sector in the S&P500, measured by the XLK ETF, dropped in December. But XLK took off at the beginning of January and returned 55% in 2023.