Since the beginning of last year, the major winners in the market have been big tech stocks. However, looking a bit further back reveals a different story, one that could re-emerge in the market’s future.
Citi recently launched a new Size and Style Chartbook, aiming to provide key insights after each earnings season. While some might argue that the season isn't fully over with Nvidia, the AI powerhouse, set to report its second-quarter results on Wednesday, over 93% of S&P 500 companies had already reported as of August 16.
The key takeaway from the Chartbook’s first edition is that, unsurprisingly, "the larger the capitalisation, the better the performance year-to-date, as well as over the past three years," according to Scott Chronert, Citi’s head of U.S. equity.
What is surprising, however, is that despite the dominance of big tech—and Nvidia’s standout growth—"on a three-year lookback, Value has been the better performing style," Chronert notes. This reflects how severe the 2022 downturn was, as it "continues to influence the multiyear performance pattern, despite growth’s leadership since early 2023." It’s a reminder not to overlook value stocks, even as growth stocks have taken the spotlight.
Citi remains somewhat cautious about the consensus expectations for the S&P 500 to deliver strong earnings per share and free cash flow growth through 2025, driven by margin expansion and mid-single-digit sales growth. However, there is potential for the pool of market winners to broaden—or as Chronert puts it, "the stage is set for a pivot in 2025."
Next year, following two years of "uninspiring earnings performance," small and mid-cap stocks are expected to close the growth gap with large caps. Additionally, the Value style is anticipated to show earnings growth comparable to Growth, supporting the firm’s thesis that the rally could extend beyond the narrow focus on hypergrowth AI plays.
That said, with the S&P 500 up roughly 1.5% last week and more than 18% year-to-date, it’s no surprise that while growth stocks trade at higher multiples than value, "both styles are expensive relative to their own histories." In contrast, small- and mid-caps are trading more cheaply after their recent underperformance compared to larger companies and their own historical valuations.
Still, you get what you pay for. Chronert observes that overall, valuations across size and style generally align with fundamentals. If consensus expectations for next year hold true and the market benefits from lower interest rates, we could see a broader range of market winners across different sizes and styles.
Citi isn’t alone in anticipating a broadening of the rally.
