Recently, a rotation in market leadership has occurred, with many investors moving from overvalued mega-cap stocks to more reasonably priced opportunities. This shift underscores the importance of maintaining a diversified portfolio to weather these transitions effectively.
We have previously discussed the concentrated leadership of seven names in the S&P 500, often referred to as the “Mag Seven.” These companies have driven a significant portion of the index’s performance. However, at some point, their stock prices will become more dependent on their current earnings than on expected future earnings. Today’s market is a bull market in which many stocks participate, but a few mega caps propel the index beyond what would otherwise occur.
Last month, we saw a notable selloff in some of these Mag Seven companies as stock prices adjusted to reflect overstretched valuations. In July, the Mag Seven dropped 12%, while the small-cap index, Russell 2000, shot up 10%. These results suggest that a rotation may be underway, with market performance broadening as investors sell big winners in favor of more reasonably valued names.
July’s star performer was the Russell 2000 index of small companies. Part of what has driven the Russell higher is the anticipation of lower interest rates in the coming months, as smaller stocks tend to be more sensitive to borrowing costs.
The key takeaway from these shifts is that market leadership rotates, and no one knows precisely when these changes will occur or persist. The important part is to maintain a diversified portfolio that can weather these rotations. At Cardinal, we focus on generating superior risk-adjusted returns through diversified portfolios of carefully selected securities. Our bottom-up investment process, guided by Cardinal Capital’s proprietary statistical model, identifies stocks trading at significant discounts or premiums relative to their normal price value. This value-oriented approach emphasizes consistency, a long-term perspective, and the ability to capitalize on short-term opportunities by identifying undervalued companies, providing a sense of security and stability to our investors.
We invest across a range of industries, targeting market-leading companies with a history of stable cash flows, demonstrated key differentiators, identifiable growth prospects, and experienced management teams. The idea is to be diversified not only by large and small companies but within various industries.
Managing a diversified portfolio by industry and sector is a key strategy to weather market rotations, especially when companies with stretched valuations give way to more attractively priced stocks. By spreading investments across various industries and sectors, we reduce the risk associated with any single segment of the market underperforming. This approach allows us to capitalize on opportunities in undervalued stocks that have better long-term return potential. As market leadership shifts, our diversified portfolio is well-positioned to benefit from emerging trends and new growth areas, ensuring stability and growth over time.
As demonstrated over 30 years, amid an ever-changing market environment, we remain confident in our long-term approach and our commitment to your financial goals. We value your trust and are committed to helping you achieve your financial objectives. Please contact us for a personalized portfolio review.
