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SMALL AS PROTECTION AGAINST DOWNSIDE, OPPORTUNITY IN UPSIDE

With the end of the second quarter in sight, Michael O' Rourke, chief market strategist at JonesTrading, examined equity performance year-to-date, since the election and since the early-April "Liberation Day," when tariff announcements unleashed a whirlwind of volatility.

And his findings lead him to small and midcap indexes.

Since the November election, O'Rourke notes that the S&P 500 .SPX rose 5.3%, powered by a >13% rally in the Magnificent Seven group of stocks. Excluding the Mag 7, the increase was 6% while the midcap S&P 400 .SP400 is down >3% and the small cap S&P 600 .SP600 is off >7.5%.

What about year-to-date? The S&P 500, excluding-Mag 7 is the leader with a 6.5% gain, while the Mag 7 is flat.

And the strategist notes that the P/E multiple of the Mag 7 has eased mildly to ~35x earnings as four members are in negative year-to-date territory.

He notes that market capitalization gains of Microsoft MSFT.O, Nvidia NVDA.O and Meta Platforms META.O offset the losses of the other four members. After Tesla's TSLA.O P/E of 170x he notes that Nvidia has the highest multiple of 49x, while Microsoft is at 38x.

At 27.6x earnings, O'Rourke says Meta "is the only upside leader that does not have a nosebleed multiple."

And he points out that investor concern about challenges to Google’s search dominance gives parent Alphabet GOOGL.O the lowest P/E of the group at 20x earnings.

"In short, the narrow leadership is even narrower in 2025," writes O'Rourke.

In changes since April 2, he points to the Mag 7 as "the market’s upside driver and performance leader with a 15.6% gain."

Not too far behind is the Russell 1000 Growth .RLGB, up 13% since Liberation Day.

While the S&P 500 is 7.5% higher, without the Mag 7 it would be up >5%. The laggards are the S&P 400, up 2.4% and the S&P 600 with a 1% gain.

"With the S&P 500 on the cusp of new record highs, it is pricing in an optimistic scenario for the back half of the year," writes O'Rourke, but he still expects "the uncertainty of the first half of 2025 to manifest in the second half of the year."

With multiples between 16x and 17x earnings, the strategist sees an interesting opportunity in the small and midcaps.

"If the expected optimistic scenario unfolds, then the rally should broaden and significantly lift the less liquid small and midcap groups."

And he argues that if instead, the economy slows down, then "the valuation discount of the small and midcap names should offer some downside protection."

(Sinéad Carew)

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