Leadership?

A lagged yield curve relationship indicates new-era relative EPS poised to underperform while the EPS of broader market stock sectors improve.

Investors are wondering what will lead the stock market once the current quest for peace with Iran is finally achieved. During most of this bull run, new era stocks – the technology and communications sectors of the S&P 500 Index – have been persistent winners. However, stock market leadership has been in flux since last Fall when the relative price of the S&P 500 Technology sector peaked. From last October to the end of March, broader market plays dominated leadership as the S&P 500 technology sector underperformed by about 12%. But most recently, as potential peace with Iran seemingly appears closer with ongoing negotiations, new era stocks have again regained leadership.

Table 1 highlights how several broader market plays have been holding their own or outpacing new era stocks since the end of October. During the last six months, while technology and communication stocks have participated – rising by 6.8% and 7.9% respectively – broader market plays have mostly outpaced new era investments. Since the end of October, the equal-weighted S&P Index, S&P 500 cyclical sectors, and the MSCI all country ex-US index have essentially matched the performance of new era stock while small caps, value stocks, and emerging market stocks have solidly outpaced the stocks of the popular innovative companies.

Should investors stick with new era stocks which recently seem to have momentum, or will broader market plays prove to be the winners during the balance of this year? Not surprisingly, the answer probably depends on earnings trends.