October 26, 2021
After this week, about we will have heard from about half of the S&P 500 companies.
The big question coming into this Q3 earnings season was about "costs." And so far, so good. Margins seem to be holding up, in the face of rising prices and rising wages.
That means companies are having success passing along prices to customers.
Microsoft and Google both reported record earnings today after the close. And we'll hear from Amazon and Apple on Thursday.
Despite the big earnings numbers, these "big tech" stocks should start feeling some of pain from the outlook for higher interest rates. Higher rates, for growth stocks, tends to bring about lower multiples and lower discounted cash flow valuations.
That's why value stocks should be in favor. But it's not happening yet.
While the S&P and the Dow have both returned to new record highs. The Russell 2000 (small caps) are lagging behind — still 2.7% from the March highs.
And it's because of this chart …
With the 10-year yield at just 1.61%, rates have not been moving up fast — thanks to a Fed that is still in control of the Treasury market.
As we've discussed in past notes, coming out of recession, small caps historically track rates higher, and go on to outperform large cap growth over the following decade (post-recession).
With the above in mind, small cap value stocks continue to be the spot of relative opportunity in the stock market.