Dow, S&P 500, Nasdaq stall with Ukraine’s fate, Fed policy in focus

The stock market has been all about large market capitalization companies for over a decade.

Dating back to 2015, Bank of America Securities Head of US equity and Quantitive Strategy Savita Subramanian found that the largest 50 stocks in the S&P 500 (^GSPC) have outperformed the benchmark index by 73 percentage points. Subramanian points out the last notable run of similar outperformance for the 50 largest stocks in the index came in the late 1990s leading into the bursting of the dot-com bubble.

Subramanian thinks a similar tide shift might be coming to markets now.

“History would suggest there is more to go in cap-weighted dominance,” Subramanian wrote in a note to clients. “But if the Fed’s next move is a rate cut, and if the Regime indicator is shifting to a Recovery, we think the run may be closer to done.”

BofA’s “regime indicator,” which includes a variety of factors such as corporate earnings revisions, inflation data and economic growth projections, has started to point to the recovery phase. This combined with a Federal Reserve that markets believe will cut interest rates by at least half a percentage point before the end of year, is a positive setup for value stocks, Subramanian argues. And the largest stocks in the market right now are “anti value.”

“[Federal Reserve] easing has been accompanied by Mega caps lagging more than leading, and higher inflation should support a broadening of the S&P 500 beyond defensives/secular growth,” Subramanian wrote.