S&P Equal Weight vs. Cap Weight
The rise of the “mega-caps” in recent years has caused a significant divergence in the performance of the S&P 500 — which is market cap weighted — and the S&P 500 Equal Weight index. As the mega-caps like Alphabet (GOOGL), Amazon (AMZN), Apple (AAPL), Meta (META), Microsoft (MSFT), and NVIDIA (NVDA) have pushed ever higher into multi-trillion dollar companies, their weight in the S&P 500 has ballooned to more than 25% of the index. In the S&P 500 Equal Weight index, however, where each of the 500 stocks has a 0.2% weighting after quarterly re-balancing, the six mega-caps make up just 1.2% of the index. Given these differences, it’s easy to see how the performance between a cap-weighted and equal-weighted index can diverge.
As shown below, the cap-weighted S&P 500 has posted a total return of just over 110% over the last five years compared to a gain of roughly 84% for the S&P 500 Equal Weight index. As you can see in the chart, the gap between the two didn’t really start widening until early on during this bull market in early 2023.
Anecdotally, the cap-weighted version of the S&P 500 seems to be getting all the love these days, with some calling it the perfect momentum index. Combining that recent sentiment with the very clear differences between the two indices, readers may be surprised that the longer-term performance between the two has been similar and even tilts towards the equal-weight version.
As shown below, over the last 20 years, the cap-weighted index has just recently overtaken the equal-weighted index on a total return basis, but outperformance has gone back and forth many times over this time frame.
And since 1990, the equal-weighted version of the S&P has actually been the clear winner over the cap-weighted version.
As you can see in the chart below, the Dot Com Bubble of the late 1990s pushed the cap-weighted S&P solidly above the equal-weighted version in the final years of that bubble, but the bursting of the bubble and the 2003-2007 bull market resulted in a performance shift that allowed the equal-weight index to pull ahead. While the mega-caps of today have had a leg up on the rest of the market for the past few years, an extended period of underperformance from them would allow the equal-weighted version to become en-vogue again.
Below is a look at the differences in sector weightings for the S&P 500 (cap-weighted) and S&P 500 Equal Weight indices. By default, the sectors with the largest number of stocks in the index will have the highest weightings in the equal-weight index.
While the Tech sector makes up nearly a third of the cap-weighted index, it’s only 13.7% of the equal-weight index. Industrials and Financials each have a larger weight than Tech in the equal-weight index, while they combine for a weighting that’s just 2/3 of Tech’s weighting in the cap-weighted index.
When looking at the pie charts below, it’s the equal-weight version that appears more balanced and diversified at the moment. No sector has a weighting below 4.4% in the equal-weight index, while the cap-weighted index has four sectors with weightings below 3.3%. Movements in Materials, Real Estate, Utilities, and Energy have virtually no impact on the cap-weighted index as a whole these days.
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Philip Morris International (PM) Pops; Yield Drops
Tuesday was a great day for Philip Morris International (PM). The company manufacturers and sells tobacco products internationally in over 180 countries, best know for its Marlboro brand. The company was spun off of Altria (MO) back in March 2008 as a way to separate its domestic and international operations. The stock surged 10.47% in Tuesday’s session in a move that entirely erased a drawdown that had been underway since the summer. From a technical standpoint, headed into earnings the stock was also stuck under resistance as it butted up against its 50-DMA. But Tuesday’s move fully erased all of the past month’s losses.
The catalyst for Tuesday’s move was earnings. PM reported its eleventh earnings triple play in its history and the first since February 2023. An earnings triple play is a term we coined back in the mid-2000s for a company that reports 1) better than expected EPS results, 2) better than expected revenue results, and 3) raises forward guidance.
In response, the stock rose over 10% for not only its best reaction to earnings on record, but also for its third best day of any session dating back to 2008 when the company was spun off of Altria Group. Those other days with over 10% gains were March 13, 2020 and October 13, 2008.
Below we show a snapshot from our Earnings Explorer tool which includes the 20 earnings reports with the strongest upside stock price reactions for Philip Morris International (PM) since it began trading back in 2008. Again, yesterday was its single strongest response to earnings to date.
Of course, a higher stock price can put a dent into dividend yields. Given the size of yesterday’s move higher, PM’s dividend yield dropped from 4.54% on Monday to 4.15% on Tuesday. That 39 bps drop is the largest single day move in PM’s dividend yield since the spring of 2020, and it leaves the yield around one of the lowest levels since March 2018. While PM’s yield is down significantly on the move and now sits in the bottom quartile of its historical range, we would note that it still holds the 37th highest yield of all S&P 500 members.
Perhaps more notably, while the dividend yield of Philip Morris International is still high relative to other stocks, uncharacteristically the opposite is true relative to bonds. In the chart below, we show the spread between PM’s dividend yield and the yield on the 10-year Treasury. As shown, for the vast majority of the stock’s history (barring a brief period shortly after the spin-off), PM had a yield larger than that of the 10-year. But yesterday’s 10%+ share price gain puts the stock’s dividend yield below the 10-year Treasury yield by roughly 5 bps.
While the relative attractiveness of PM’s dividend has perhaps taken a hit, the strong results of earnings means that the safety of the yield has become more attractive. In the chart below, we show the dividend payout ratio of Philip Morris. This ratio shows the percentage of earnings that a company pays out through dividends. Even after raising its dividend last month, PM’s dividend payout ratio has fallen down to 68.3% which is the lowest reading since Q3 2013.
Bespoke’s Morning Lineup – 10/23/24 – Not Lovin’ It
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“If you are first you are first. If you are second, you are nothing.” – Pele
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We’re looking at another negative equity market open today, and once again, the Dow is leading the way lower. The E. coli outbreak tied to McDonald’s (MCD) has that stock down 7%, which works out to more than half of the Dow’s pre-market losses. Along with the negative news from MCD, Starbucks (SBUX) lowered guidance, so it’s not shaping up to be much of a good morning for companies tied to the fast food sector.
The only economic report on the calendar this morning is Existing Home Sales at 10 AM, but there have been plenty of earnings reports in the pre-market with more to come after the close.
The last week has been mixed for equities on a global scale. As shown in the snapshot from our Trend Analyzer, emerging market equities have been the top performer narrowly edging out US stocks with a gain of 0.69%. These are also the only two regions with positive returns as European, Latin American, and Asia Pacific stocks are all lower. With most regions trading lower, the Developed World ex-US ETF is also down 0.71%.
It hasn’t just been the last week where these regions have underperformed. On a YTD basis, the US has rallied 23.5% while emerging markets are up just under 14%. All four of the other ETFs, meanwhile, are up less than 10%, or in the case of Latin America (ILF) down over 10%.
Looking at the charts of all six ETFs over the last year, EEM and SPY have maintained their rallies and trade above their 50-day moving averages. The four other ETFs, however, look less promising from a technical perspective. ILF has been below both its 50 and 200 DMAs for several days now while SPDW, VGK, and VPL all broke below their 50-DMAs in the last few days.
The Closer – Fast Food Fiasco, Credit Cards – 10/22/24
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Looking for deeper insight into markets? In tonight’s Closer sent to Bespoke Institutional clients, we kick off with an earnings rundown (page 1) followed by a dive into credit card delinquencies (page 2). We finish with an update of our Five Fed Manufacturing Composite (page 3).
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Daily Sector Snapshot — 10/22/24
Chart of the Day – High Yield Spreads Go Low
Bespoke Stock Scores — 10/22/24
Trump’s Odds Pass 60%
We are now only two weeks away from Election Day. As the day draws near, polls have flipped between marginally favoring one candidate or the other over the past few months. In other words, according to polling, the election outcome is a coinflip. Meanwhile, betting markets have seen some significant moves and are projecting more of a decisive outcome. We discussed how these have related to equities’ performance in last week’s Bespoke Report. Moving deeper on the odds themselves, below we show data from ElectionBettingOdds.com which now puts former President Trump at an over 60% chance of winning the November election. That is the highest odds for him since July 22nd following news that President Biden officially dropped out of the race and when Vice President Harris assumed the candidacy. Trump’s gains have of course come at Harris’ losses as her odds are down to 39%. With that being said, at those levels, Harris’s odds remain stronger than the median reading for Biden during his time in the campaign. In fact, during the current election cycle up until dropping out, Biden only had stronger odds than Harris currently does from March through early June of this year.
As with any election, the past year has been eventful and in turn, there have been massive swings in betting markets’ predictions of the November winner. Below, we show how the odds have changed since various events like the debates, Biden dropping out, and the first assassination attempt on Trump’s life. While the event didn’t perfectly line up with the latest peaks and troughs in odds, the time after the second debate has seen a particularly big swing. President Trump has seen his odds rise close to double digits since then. That hasn’t been a full recovery from the peak in his odds when Biden dropped out, but it does make things unchanged since the first assassination attempt on July 13th.
In the chart below, we show each party’s odds at 14 days out from the election for each of the past three cycles. As shown, 2016 and 2020 saw heavy favoritism for the Democrats at a comparable point in time. 2016 in particular was predicting a landslide with Democrats being given an 84% chance. 2020 was a closer race, but still favored Democrats with a 63% chance of winning. This time around, those odds are flipped with Republicans now favored. Additionally, this is still the tightest race of these years albeit only by a few percentage points (relative to 2020). As for where the odds might move to in the next couple of weeks, we would note that in 2016 and 2020, there were only a few points difference between the odds at 14 days out versus the day before Election Day.
For another comparison to those previous elections, below we show how Republican betting odds shaped up over the year before election day in 2016, 2020, and this year. As noted in the chart above, there are examples of odds being much more elevated in each of the prior elections with Democrats being given a better than 80% chance to win at the comparable time in 2016. However, for Republican odds, outside of this past summer, the only other time where Trump was given a 60%+ probability of winning was briefly in February 2020. Of course, like polling, betting market predictions are no sure thing. While the outcome predicted in 2020 was correct, results in 2016 were wildly off.
Bespoke’s Morning Lineup – 10/22/24 – Yields Keep on Truckin’
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“aggressive conduct, if allowed to go unchecked and unchallenged ultimately leads to war” – John F Kennedy, 10/22/1962
Below is a snippet of commentary from today’s Morning Lineup. Start a two-week trial to Bespoke Premium to view the full report.
Just when it seemed nothing could go wrong for the market, yesterday we had a weak day underneath the surface in terms of breadth. That weakness has continued into this morning as US futures are firmly lower following a decline of over 1% in the Nikkei. In Europe, despite positive earnings from SAP and Logitech, the STOXX 600 is down close to 1%.
Treasury yields remain the culprit as the relentless rise in longer-term interest rates continues since the Fed cut rates in September. The 10-year yield has risen above 4.2% for the first time since the summer as the market continues to experience one of the sharpest increases in yields following a rate cut in at least the last 30 years.
The S&P 500 was only down 0.18% yesterday, but breadth was terrible with a net advance/decline reading of negative 338. The weak breadth was also evident in the equal-weighted S&P 500 which was down 0.85%. The 4% rally in NVIDIA (NVDA), which is now within 2% of Apple’s (AAPL) market cap, was a big factor behind the big performance spread between the cap and equal-weighted indices. The scatter chart below compares the S&P 500’s daily percent change versus the net A/D reading, and the shaded area highlights days when the net A/D reading was between -350 and -300 (yesterday was -338). On those days, the S&P 500’s average decline has been 1.23%. To put yesterday into perspective (red dot in lower chart), it is one of just two days since 1997 that the net A/D reading was between -350 and -300 and the S&P 500 was down less than 0.25%!
Can you believe it? The day is almost here. Two weeks from today is the last day we can vote in the 2024 Presidential Election, and then we’ll finally get a break from all the politics. Right?
Like what we did two weeks ago, the chart below shows the performance of the S&P 500 in the two weeks leading up to Election Day for all years since 1948, and we have noted Presidential Election years in dark blue. While you might expect volatility leading up to Election Day, the S&P 500 has historically performed better in the two weeks leading up to Presidential elections (1.62%) than it has in non-presidential election years (0.87%), but it has been slightly less consistent to the upside at 68.4% during Presidential election years versus vs 73.3% in non-election years. The biggest gains and losses for the S&P 500 during these two weeks have also been during non-presidential election years (9.1% in 1962 and a decline of 4.4% in 1973). During Presidential election years, the largest gain was 5.4% in 1960 and the largest decline was 2.6% in 1988.
The table below lists the performance of the S&P 500 during the two weeks leading up to each Presidential election since 1948. Along with that, we have also included the number of days that had transpired between the last all-time closing high (ATH) and each Election Day, the number of ATHs in the 50 trading days leading up to Election Day, and whether the part of the incumbent or non-incumbent party won the election.
This year isn’t listed on the table since it’s not Election Day yet but with nine all-time highs already in the 50 trading day window (with ten to go) this year is already tied with 1964 and 1968 for the second most. With the most recent all-time high occurring last Friday, even if there isn’t another closing all-time high between now and then it will rank at least as the fourth fewest number of days between the last ATH and Election Day. The only ones with a shorter gap were 1996 (0 days), 1972 (1 day), and 1968 (8 days).
We also found it interesting that strong markets don’t necessarily help the incumbent party, but short-term weakness in the two weeks before may hurt the incumbent party. In the nine prior periods when the S&P 500 hit an all-time high within 100 trading days of Election Day, the incumbent party only won the Presidency four out of five times. There have been five prior periods when the S&P 500 was down in the two weeks leading up to the election, and in four of those periods, the non-incumbent party won. These are all small sample sizes, and there were other factors at play in each election, but any excuse to talk politics, right?
The Closer – Earnings, Rates, VIX Goes Long – 10/21/24
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Looking for deeper insight into markets? In tonight’s Closer sent to Bespoke Institutional clients, we lead off with a look at the latest earnings (page 1) followed by an update on rates (page 2). We then preview this week’s upcoming Treasury auctions (page 3) then finish with an update on futures positioning (pages 4 – 7).
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