Large-Cap Growth Beats Everything

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The past year has been a rocky road for stocks, but growth in particular has certainly seen its fair share of underperformance. The last month especially has been a remarkable microcosm of that underperformance. As we approach the one-year mark of the latest all-time high in growth-oriented indices like the Nasdaq (discussed on today’s Chart) or the S&P 500 growth index, the relative strength of large-cap growth has collapsed against stocks in general, as well as growth and value across various market cap ranges.

As shown below, the growth of the S&P 500 relative to the S&P 500 moved steadily upward (upward trend lines indicate S&P 500 growth outperformance) throughout the post-global financial crisis era and it absolutely took off in the early stages of the pandemic. After peaking in November last year, the relative performance of growth has been on the downside, erasing most of its pre-pandemic outperformance. In fact, following the historic megacap weakness in earnings (which we discussed in last week’s Bespoke report) that has continued this week, relative strength is now at the lowest level since late February 2020.

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Large-cap growth has not only underperformed other large-cap companies, it has also vastly underperformed its small- and mid-cap peers. From the years after the dot-com bubble to the period of the global financial crisis, large-cap growth underperformed growth stocks of the small- and mid-cap varieties. The last decade, however, has erased much of that underperformance. In fact, the 20-year relative strength line of S&P 500 growth vs. S&P 400 growth actually briefly turned positive in early February of this year. In other words, after nearly two decades, the performance of large-cap (S&P 500) and mid-cap (S&P 400) growth was finally about equal. Since then, the relative strength line has turned sharply lower and is now testing the uptrend line that has been in place since 2016.

Relative to small-cap growth, large-cap growth was much weaker in the first half of the 2010s and didn’t really start to pick up until the last five years. That said, it also peaked much earlier (September 2020) than relative strength vs. mid-cap growth and is yet to test its multi-year uptrend line.

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Where the most dramatic underperformance of large-cap growth has been is in relation to value stocks. As shown in the first chart below, relative to large-cap value, large-cap growth generally remains in its long-term uptrend, although most of the post-pandemic outperformance has been erased. However, moving down the market cap chain makes that picture worse and worse. The relative strength line of S&P 500 growth versus S&P 400 value recently hit a new low for the post-pandemic period, approaching the flat line in the process. In other words, large-cap growth has nearly erased all of its outperformance against mid-cap value, not just since the start of the pandemic but over the past 20 years. As for the small caps, that outperformance is now completely gone as the relative strength line now posts negative readings. Against both mid-cap and small-cap value, large-cap growth has definitively broken its multi-year uptrends that had been in place since late 2016.

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Publisher’s note: The bullet points in this article were chosen by the editors of Seeking Alpha.

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