How is there such a relentless bid for big-cap tech names?
Part of it is structural. Companies like Nvidia and Microsoft can make up a combined 15% of the S&P 500 thanks to their sheer size.
And week after week, 401k and other passive investment plans put more money into market indices, benefitting these already large plays.
But we’re seeing another trend at play too. Today’s investors are increasing their stakes in big companies by moving out of small companies:
Investors aren’t just going all in on big-tech stocks, they’re selling off better-valued small caps to do so. (Source: BofA)
It’s a feature of the most terrifying bull market of our lifetimes.
Year-to-date, over $80 billion has flowed out of small-cap U.S. stock funds. These are the companies that can include the proverbial next Nvidia or next Microsoft.
Many of these companies trade at far more reasonable valuations than Microsoft and Nvidia today. And their growth rates can be just as impressive. It’s easier for a small-cap company to double earnings than a company that’s already earning tens of billions per year.
It’s likely that investors won’t rediscover these stocks until the big-cap names falter. But for all our criticism of investor enthusiasm and high-flying valuations in the overall market today, small cap stocks are starting to look like a relative value, especially for more patient investors.
The ol’ timers will tell you “small caps lead the way out” of a bust. For now, big tech continues to suck up global capital.
~ Addison
P.S.: With the Federal Reserve on track to cut interest rates at its September meeting, the stock market as a whole may get a shot in the arm – small caps and large caps alike.
Our research has found several pockets of opportunity in small-cap stocks this year, particularly in areas that can benefit from President Trump’s Great Reset of the U.S. economy.
Key areas that have already been attractive include the cryptocurrency space, resource stocks, and plays on next-generation nuclear technologies.
As always, your reader feedback is welcome: feedback@greyswanfraternity.
