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  • Writer's pictureAvory Team

We See Equity Tailwinds on the Horizon





Data #1

Contrarian Indicator: Bulls Drying Up Similar to Late 2023 Meltup



Why does this data matter?

We preach to not be contrarian for contrarian sake, but rather use data to drive any sort of contrarian optimism. This week's analysis highlights a low percentage of investors (17%) looking to add to their equity portfolios. While not a guarantee of a similar rise as late 2023, it suggests room for growth, potentially triggered by an upcoming Fed rate cut.

Here's a breakdown of your insights:

  • Low Investor Interest in Equities: Similar to pre-2023 trends, a low percentage of investors are currently interested in adding to their stock holdings. Currently 17%, was 15% in June 2023 and peaked at 80% prior to 2022 drop.

  • Potential for Growth: This data point suggests there's room for increased equity allocation in the future. It’s all about supply and demand, and with demand seemingly low, there’s only upside for demand to increase. The question is is whether there’s a catalyst.

  • Fed Rate Cut as a Catalyst: An upcoming interest rate cut by the Federal Reserve could be the trigger for this growth.


 


Data #2

Top Heavy Markets Not a Bad Thing, But Better for Avg Stock 6 Months Out



Why does this data matter?

Let's analyze the performance gap between the S&P 500 and the S&P 500 Equal Weight Index.

The S&P 500, being market-cap weighted, heavily favors large companies like Nvidia and Microsoft. This can mask the struggles of the "average" stock. Keep in mind Microsoft trades at 38x earnings, growing 10%, not exactly a bargain despite that it is well positioned for where the world is headed.

Recently, we've seen a significant divergence. The overall index has risen, driven by mega-caps, while the equal-weight version, reflecting the average stock's performance, hasn't performed as well, and small and mid caps being unfairly hit.

Here's where it gets interesting: historically, when this divergence is this large, the equal-weight index has outperformed the S&P 500 in the next six months, and moving higher 90% of the time.

This suggests that based on historical trends, the average stock might see a potential upward correction in the coming months when rates are cut.

Key Points:

  • Mega-caps are driving the S&P 500 higher, masking the weakness in the broader market.

  • The S&P 500 Equal Weight Index reflects the "average" stock's performance. Small and mid caps struggle as rate fears and economic fears remain. Something we predicted in our annual letter.

  • Historically, when the divergence is this large, the equal-weight index has outperformed but both do well.


 


Data #3

…and Avg Stock is Much Cheaper than 10 Largest Stocks.



Why does this data matter?

Now let's look at valuations. When you exclude the top 10 companies from the S&P 500, the remaining index trades at a much more reasonable price-to-earnings ratio (P/E) of around 18. This is in contrast to the top 10 stocks, which trade at a significantly higher P/E of over 30. Again Microsoft boasts a hefty 38x earnings on 10-14% growth.

This suggests that there might be better value opportunities outside the mega-cap companies. Smaller companies (small-cap and mid-cap) trade at even lower P/E ratios, around 10 and 13 times earnings, respectively.

These smaller companies could be attractive because their stock prices may not fully reflect their underlying performance. This presents a potential opportunity for investors seeking value. Keep in mind we look for small and mid cap companies valued around $1B to $10B that are leaders in their space, will likely benefit from Ai, and have competitive advantages.

Key Points:

  • Stocks outside the top 10 companies in the S&P 500 trade at lower valuations.

  • Smaller companies (small-cap and mid-cap) have even lower P/E ratios.

  • This could indicate better value opportunities compared to mega-cap stocks.



 

About Avory & Co.

Investing where the world is headed. 


Avory specializes in high-conviction equity strategies, emphasizing Secular Growth and Transformation Stories driven by exceptional teams. Data guides decisions. We cater to high net worth investors, family offices, and institutional investors. Note: This information doesn't constitute a recommendation to buy or sell any mentioned securities. Avory is based in Miami, Florida with clients all across the globe.


Send us an email: Team@avoryco.com

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Disclaimer: Not a recommendation to purchase or sell any securities mentioned. This is for educational purposes only.


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