Yardeni Research analysts highlight an investment shift from Growth to Value stocks, asserting that this rotation "appears to be the real deal rather than another false start."
The transition is also accompanied by a movement from the S&P 500 LargeCaps to the S&P 600 SmallCaps and S&P 400 MidCaps, collectively known as the "SMidCaps," notes the firm.
According to Yardeni Research, investors are optimistic about the SMidCaps' earnings growth continuing to recover from pandemic-induced weaknesses through the end of the year, with expectations of a double-digit percentage growth rate by 2025.
This optimism is founded on the recovery from the inflationary pressures that surged in 2021 and 2022, impacting earnings and margins across all market capitalization styles.
The analysts note that the "Magnificent-7" group—comprising Alphabet (NASDAQ:GOOGL), Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL), Meta (NASDAQ:META), Microsoft (NASDAQ:MSFT), Nvidia (NASDAQ:NVDA), and Tesla—experienced substantial earnings declines for five consecutive quarters from Q1 2022 through Q1 2023.
This contrasts with the broader S&P 500's three consecutive quarters of decline from Q4 2022 through Q2 2023 and the S&P 493's (S&P 500 minus the Magnificent-7) four quarters from Q4 2022 through Q3 2023.
However, Yardeni Research adds that since the AI-spending boom began in late Q1 2023, the Magnificent-7 have outperformed other indexes, with their aggregate revenue and earnings growth rates accelerating sharply.
This growth is said to have significantly contributed to the improvement in the S&P 500's quarterly earnings growth rates, even as the S&P 493 continues to face challenges.
Yardeni Research emphasizes that the robust earnings recovery among the SMidCaps and the shift away from large caps suggest a sustainable rotation. This strategic shift is underpinned by healthier earnings support, indicating a solid foundation for this new market dynamic.