Investors showing a 'more discerning pallet', says Schwab's Liz Ann Sonders
Speakers
Liz Ann Sonders
— Chief Investment Strategist, Charles Schwab
Summary
Liz Ann Sonders of Schwab Center for Financial Research said the market is broadening beyond cap-weighted domestic equities, with investors showing more discernment and lower correlations within groups such as the Magnificent Seven. She sees continued rotation and dispersion as the most likely path for the S&P 500, with better performance under the surface of cap-weighted indexes. She also said small caps typically outperform in a breadth-heavy year, while mega-cap areas face potential valuation pullbacks.
- Market broadening into equal-weight and international equities.
- Small caps historically outperform when S&P breadth is high.
- S&P 500 is most likely to see continued internal rotation and lower correlations.
- Mega-cap areas face potential valuation rationalization and pullbacks.
- Technology and Communication Services showed dispersion today.
- Retail traders were described as buying post-earnings dips.
Ideas
Market broadening and rotation are healthy
The market is broadening beyond cap-weighted domestic equities into equal-weight and international equities. She sees more discerning investors and traders, rising dispersion and lower correlations as a healthy backdrop for the market, and expects this rotation to persist.
Small caps outperform in breadth-heavy market
In a year where more than 60% of S&P 500 stocks outperform the index, historically a defensive, possibly down-S&P backdrop, small caps typically outperform. She sees that breadth-heavy backdrop as an opportunity for small caps.
S&P 500 faces persistent internal rotation
The most likely scenario for the S&P 500 is continued internal rotation with more dispersion and lower correlations, even within the Magnificent Seven and within leadership sectors like technology and communication services. Better performance should come under the surface of cap-weighted indexes.
Mega-cap valuations risk pullbacks
A 2021-style valuation rationalization could continue to pressure mega-cap areas, driving pullbacks up the cap spectrum, while performance is better under the surface of cap-weighted indexes. She does not frame this as an active short, but as a risk to owning mega-caps.
