Market Divergence: S&P 500 vs. Value Line Geometric Index

The S&P 500 is poised to achieve its fifth consecutive record close on Thursday, a remarkable feat. However, not all indicators of the U.S. stock market’s health share the same positive outlook.

One such indicator is the Value Line Geometric Index (VALUG), an equal-weighted index that tracks the median performance of around 1,700 large listed companies traded in North America. According to FactSet data, this index continues to trade well below its previous highs from November 2021, registering a significant 17% decline.

This disparity between the Value Line Geometric Index and the S&P 500 offers valuable insights for investors. Primarily, it highlights how the stellar performance of a select few megacap technology stocks has been the driving force behind the S&P 500’s upward trajectory over the past year.

Steve Sosnick, chief market strategist at Interactive Brokers, believes that the gap between these two indexes is a result of the increasing concentration of large-cap stocks in the market. In an interview, he stated that this concentration has contributed to the divergence we observe.

To gain further understanding of the current dynamics shaping the U.S. market, investors can examine the performance gap between two other indexes: the Russell 2000 index, representing small-cap stocks, and the broader-based Wilshire 5000 (XX: W5000FLT), which comprises approximately 3,500 actively traded U.S. stocks. This analysis can provide additional insights into the prevailing market trends.

The Market’s Performance: A Comparison

As of late Thursday, the Wilshire 5000 was trading at 49121.30, just 0.1% below its most recent record high from Jan. 3, 2022. This indicates a strong performance for the index.

On the other hand, the Russell 2000 is currently trading approximately 20% below its record closing high from November 2021. This significant difference suggests that the market is divided between small caps and large caps.

According to experts, this discrepancy reinforces the idea that the performance of small caps versus large caps is an important factor to consider in the market.

To further support this notion, let’s examine the relative performance of the S&P 500 growth index compared to the S&P 500 value index. Analyzing their performances over the past three months reveals that large-cap value stocks have been making strides to catch up to the “Magnificent Seven” and other market leaders in the tech space.

From Oct. 31 onwards, the S&P 500 value index experienced a growth of about 14% through midday trading on Thursday. In contrast, the S&P 500 growth-factor index saw an increase of 17% during the same period. However, looking at the past 52 weeks, we observe a wider disparity between the two indices. The S&P 500 growth index recorded a gain of 29%, while large-cap value stocks only saw a gain of 13%.

Despite these variances, the overall market seems to be performing well. As of Thursday afternoon, the S&P 500 was up 0.2%, on track to finish around 4,877, according to FactSet data.

In conclusion, the market’s performance is showing significant differences between large caps and small caps, as well as between growth and value stocks. Investors should closely monitor these trends to make informed decisions in the ever-changing market.

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