2020.11.30 – How To Outperform By 50–250% Over 2–3 Years

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EXECUTIVE SUMMARY

Investors are increasingly convinced that the cyclical and Great Rotation trade is very real and long-lasting (see Everything You Need to Know About the “Great Rotation” But Were Afraid to Ask). That should be bullish for the S&P 500, right? Well, sort of.

Despite the cyclical and reflationary tailwinds for stocks, the S&P 500 has a weighting problem. About 44% of its weight is concentrated in Big Tech (technology, communication services and Amazon). The top five sectors comprise nearly 70% of the index weight, and it would be difficult for the index to meaningfully advance without the participation of a majority of these sectors. However, an analysis of the relative performance of the top five sectors does not exactly inspire confidence as to the sustainability of an advance.

We conclude that the leadership of U.S. over non-U.S., growth over value and large caps over small caps are all turning in convincing fashions. While a rising tide does lift all boats, the S&P 500 is likely to lag owing to the heavy weighting in Big Tech stocks, which are likely to be laggards in the next cycle. Investors can outperform by 50–250% over the next 2–3 years with exposure to a combination of cyclical, value, small caps and non-U.S. stocks.

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