The stock market has continued its historic rally with the S&P 500 gaining 14+% year-to-date, contributing to a total return of 55%+ since the market bottom in 2022. While much of this performance has been driven by large cap technology stocks over the past 18 months, there are now signs that other parts of the market are benefiting as well. These shifts highlight the important fact that while investing trends may come and go, it’s the tried-and-true principles of investing that help investors grow their portfolios and achieve their financial goals over years and decades.
Performance is broadening beyond large cap growth
While investors tend to focus on major market indices and the one or two areas driving recent returns, the reality is that performance leadership tends to change over time. Large cap tech stocks have dominated headlines recently and for good reason—the largest tech names have gained 180+% over the past year and a half, partly due to excitement over artificial intelligence breakthroughs, and partly because lower interest rates are generally positive for growth.
However, there are now signs that other areas of the market are beginning to participate, with three important implications for investors.
First, recent economic reports confirm that inflation is improving which could lead the Fed to cut rates. This has propelled areas such as small cap stocks and large cap value. Small caps in particular tend to be more sensitive to interest rates since they represent less mature companies that often have more limited access to capital.
Growth and value can each outperform over long periods
What exactly are value and growth stocks? Those with lower valuations tend to be characterized as “value” while those with higher valuations are classified as “growth.” Value investors hope that a stock’s share price will adjust based on fundamentals, while growth investors hope that a company will continue to grow substantially.
Historical perspective shows how value and growth have fluctuated over time. In the late 1990s and early 2000s, growth stocks outperformed during the dot-com boom. This then gave way to strong outperformance of value stocks through much of the 2000s. This cyclical rotation from growth to value and back has occurred throughout history.
Diversifying across styles helps to reduce portfolio risk
Finally, the outperformance of growth stocks does not mean that diversification is no longer relevant. In fact, the opposite is true: diversifying across styles allows investors to benefit from recent market trends while also protecting their portfolios from potential risks. The price-to-earnings ratio of large cap growth is now 28.4, driving the overall S&P 500 index P/E to 21.2. In contrast, large cap value only has a P/E of 15.7 while small cap value is far less expensive at 13.8.
Performance has broadened across sectors as well. Ten of the eleven S&P 500 sectors have positive returns this year, with only the real estate sector slightly negative.
The bottom line? History shows that long-term investing isn’t just about “predicting winners”—it’s also about diversifying across styles, sectors, and more. Market leadership not only changes over time but also can do so swiftly. Staying diversified allows long-term investors to benefit from opportunities while also having a smoother ride as they work toward their financial goals.
-Paul R. Rossi, CFA