Market Cap & Earnings Signals Flash Cycle Shift

Callum_Thomas
02-20

1. Market Cap Weight

As noted above, defensives’ market cap weight reached an all-time low last year, since then they have ticked up as tech has ticked down off record highs.

Again, this tells us about the state of the market cycle (note where previous extremes were, and how fleeting they ended up being — and how they ultimately resolved).

But it also tells us important investment strategy takeaways such as how passive index investors are now heavily exposed to tech and on the contrary, also have historically low exposure to the diversifying and risk-dampening attributes of defensives.

So this is a timely prompt to consider both the big picture macro-market outlook, but also the pragmatic implications for portfolio strategy (e.g. is this the right sector mix for equity exposure? should you look into smart diversification and up-weighting risk dampeners?)

2. Earnings Weight

For completeness, here’s the earnings version of the market cap chart above, this one shows the earnings weight (or earnings % share) of each of those big 3 sector groups.

We can see that tech boasts the biggest earnings share, but also that cross-checking it against the chart above we can also see that the market has overshot.

Meanwhile, the history of defensives’ earnings weight tells us exactly why they are called defensives — because in times of turmoil and downturn, defensives’ earnings just keep plodding along and become a larger share of the index as tech and cyclicals ex-tech see earnings crunched by crisis, sector boom/bust cycles, and recessions.

So it pays to be cycle aware then think about equity exposure, stock market ups and downs, and overall asset allocation. $S&P 500(.SPX)$ $NASDAQ 100(NDX)$ $Invesco QQQ(QQQ)$

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