The average stock in the S&P 500 is up just under 7% since the index made its double bottom closing low on April 2nd. As shown in the chart for SPY (the S&P 500 tracking ETF) below, price has been steadily trending higher since 4/2 — making a series of higher highs and higher lows. Until the index is able to break above its late January all-time closing high, however, the market’s long-term uptrend cannot be re-confirmed.
So what has been driving performance since April 2nd? We regularly run a report called our “Decile Analysis” where we look at a number of different stock characteristics to see which ones are driving outperformance or underperformance. Examples of some of the stock characteristics we look at include market cap, dividend yield, valuations, institutional ownership, analyst ratings, etc.
Since April 2nd, one of the performance metrics from our Decile Analysis that stands out the most is valuation.
Below is a chart showing the average performance of S&P 500 stocks by decile based on trailing 12-month P/E ratios. Decile 1 contains the 50 S&P 500 stocks with the lowest (cheapest) valuations, while decile 10 contains the 50 stocks with the highest (or most expensive) valuations.
As shown in the chart, the lower the P/E ratio, the weaker performance has been as the market has rallied since the April 2nd low. The 50 stocks with the lowest P/E ratios as of 4/2 are up an average of 2.25% since then (the weakest of any decile), while the 50 stocks with the highest P/E ratios are up 12.69% (the highest of any decile).
Seeing “growth” outperform “value” during a significant market rally is to be expected, but the degree of outperformance this time around has been especially stark.