Big Takes the Stage

At certain points in market cycles, size/style decisions can pack more wallop. We believe now is one such time—and large cap growth stocks are likely to outperform the broader market for the rest of the bull market. Moreover, we believe there’s plenty of bull market ahead.

In the early stages of a bull market, the reverse is true—small value tends to lead. In our view, this can be attributed to a bounce-back effect. These smaller stocks tend to be highly economically sensitive. In the later stages of a bear market, folks fear economic Armageddon is nigh—or at least, something approaching the Great Depression. If things are as bad as they fear, these little stocks will likely soon be a distant memory—and so they get hammered.

But then, quietly, sentiment melts—just a bit. The world isn’t ending. Things aren’t great, but they aren’t the utter disaster most were expecting. And expectations are vastly lowered due to widely known poor economic conditions—the surprise power of such negative news is thus, sapped. Accordingly, those stocks that were punished so harshly at the end of the bear—mostly small value stocks—spring back strongly.

Then, as the bull market wears on, the new bull market myopia starts wearing off. Folks start thinking more long term. Investors start preferring firms they think are positioned for the long haul. The small, value-oriented firms they view as lacking long-term growth prospects become less attractive as firms compete for growth, not just mere survival in an adverse macro environment. They want high-quality names they view as having long-term earnings potential. Firms with deep product pipelines. Good management. The kind of stocks they think can weather any storm. These are typically your big cap (even mega cap) firms, and they’re often growthier in valuation.

At the beginning of 2012, large cap growth started beating small cap value pretty consistently. But once this transition takes place—and it doesn’t happen overnight—it lasts for quite a while. Meaning you don’t have to nail the timing (which would be near-impossible to do anyway) to benefit from this size/style shift. What’s more, typically, once the shift happens, big cap outperforms for some time. Meaning this bull market likely still has plenty of room to run.