Earnings & Valuation

It has been a “Lost Decade” for the S&P 500 LargeCaps with a loss of 12.8% since the S&P 500 peaked at 1527.46 on March 24, 2000 through yesterday’s close. Over the same period, there was no lost decade for the SMidCaps, with the S&P 400 and S&P 600 up 100.1% and 105.3%. The short-term and long-term outperformances of these two indexes is attributable to their outperforming earnings and valuations. The forward earnings of the S&P 400 and 600 are up 153.8% and 126.3% since the start of 2000, while it is up 75.4% for the S&P 500. The former two now exceed their 2007 record highs, while the forward earnings of the S&P 500 now matches its previous record high during 2007. All three have traced out remarkably strong V-shaped recoveries over the past two years.

Valuation has also contributed to the divergence of the LargeCaps from the SMidCaps. During the late 1990s and early 2000, the forward P/E of the S&P 500 exceeded those of the SMidCaps by as much as 600bps. LargeCap IT stocks had lofty multiples that came crashing down over the past 10 years. The S&P 500 IT sector’s forward P/E peaked at a record 48.3 (hard to believe, but true) during March 2000 and fell to a low of 10.4 during November 2008. It is currently at 12.5.