Key Points
- Yardeni Research remains bullish on LargeCap Information Technology.
- SMidCap indexes underperformed due to flat forward earnings.
- S&P 500 profit margins have reached record highs, unlike SMidCaps.
- Yardeni criticized the Russell 2000 for its high percentage of unprofitable firms.
Technology, semiconductor, and the “Magnificent 7” stocks fueled a 0.5% rise in the S&P 500 index on Monday, closing at 5,975. Semiconductor stocks were buoyed by Foxconn’s announcement of a 15% year-over-year revenue increase, contributing to Nvidia’s 3.4% stock price gain. This positive momentum in the tech sector came alongside a strong performance on Wall Street.
Yardeni Research reinforced its recommendation to overweight the S&P 500’s Information Technology and Communication Services sectors. However, the firm expressed less enthusiasm for the Midcap S&P 400, SmallCap S&P 600, and SmallCap Russell 2000 indexes, all of which experienced declines on Monday. Yardeni linked the underperformance of SMidCap stocks since mid-2022 to flat forward earnings trends, in contrast to the record-high forward earnings of the S&P 500 since mid-2023.
Yardeni proposed that many promising, profitable SMidCap companies are being acquired by LargeCap firms before they ascend to higher market caps. Additionally, while forward revenues of the S&P 500 and S&P 400 have climbed to record levels since mid-2022, the S&P 600’s forward earnings have stagnated.
Profit margins also tell a divergent story. The S&P 500’s forward profit margins have reached record highs, whereas margins for the S&P 400 and S&P 600 remain below their early 2022 peaks. Forward price-to-earnings (P/E) ratios for the S&P 400 and S&P 600 increased from 14.0 to 16.0 last year, largely driven by multiple expansions rather than earnings growth.
Yardeni also scrutinized the Russell 2000 as a benchmark for SmallCap stocks, noting that over 30% of its companies are unprofitable. This has inflated its forward P/E ratio compared to the S&P 600, which Yardeni prefers as a more reliable measure of SmallCap performance.
