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Below is a chart and brief excerpt from today’s Market Situation Report written by Tier 1 Alpha. If you’re interested in learning more about the Hedgeye-Tier 1 Alpha partnership, there’s more information here. |
The media buzz about "Big Tech" nearing a new peak compared to small caps is evident. Our latest chart showcases the dominance of large tech firms over small-cap stocks since 1995. While previously we likened ARKK's performance to the Dotcom era, suggesting a psychological parallel, our current focus lies on the robustness of big tech. They've contradicted the 1992 Wall Street axiom of "small is beautiful," spearheaded by Ken French and Eugene Fama's "systematic value" investing theory.
Throughout the '90s, firms like Dimensional Fund Advisors and AQR burgeoned, even as they lagged behind tech stocks. In 1997, LSV Asset Management's future founder, Josef Lakonishok, highlighted the split views on value strategies and their superior returns. Some attribute the success of large-cap tech to interest rates, equating high-priced growth stocks to long-term bonds. However, this correlation falters as rising interest rates have yet to impact big tech's continued outperformance.
The crux lies in "inelastic markets," where price behavior stems from flows rather than valuation. Misguided index theories and unchecked stock price manipulation for executive gains have shaped our present market. The S&P500 buyback index versus the Russell 2000 underscores the accurate tale: Big Tech's rise isn't solely about tech. It's about the cash channeled into share repurchases from passive investing and corporate funds. Until regulatory bodies recognize the sway of passive and corporate share buybacks, predicting a collapse similar to 2000 remains speculative. Russell has arguably been the better representation of the real economy for the past 24 months and will continue to be.
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Learn more about the Market Situation Report written by Tier 1 Alpha. |
