Market Movers & Shakers

Stocks set fresh record highs last week, with the S&P 500 and Nasdaq finishing in the green for the third-straight week. The small-cap Russell 2000 finally broke above its previous record closing high set nearly four years ago in November 2021 and notched its seventh consecutive weekly gain. Mega cap technology continued to lead the indices higher, with notable outperformance last week from Tesla and Google. The equal-weight S&P 500 ended last week slightly lower while six of the eleven sectors in the S&P 500 also closed in the red, suggesting that the average stock in the S&P 500 is struggling to keep up with the larger constituents. A growing number of market participants have become increasingly concerned about the rising concentration within the major indices. Last week’s sector performance perfectly illustrates the narrowness and degree of concentration: Communication Services (41% of the XLC is Google and Meta), Information Technology (46% of the XLK is Nvidia, Microsoft, Apple, and Broadcom), and Consumer Discretionary (42% of the XLY is Amazon and Tesla) were the only sectors to outperform the broader market last week. Meanwhile, Real Estate, Consumer Staples, Materials, Healthcare, Utilities and Energy all finished in negative territory, while Financials and Industrials were positive but underperformed.



Source: FactSet

From a market breadth perspective, the breakout in small-cap stocks is undoubtedly a positive sign. In addition, stocks outside of the U.S. are also reaching new highs, with the MSCI All Country World Index, tracking both developed and emerging markets, hitting all-time highs. Emerging market stocks have gained momentum of late as well, suggesting that investors are willing to take on more risk. However, not all indicators of market breadth are flashing positive signals. The S&P 500’s advance/decline line has stalled in recent months, and the percentage of S&P 500 companies trading above their 50-day moving average has dropped significantly, from 80% at the start of July to 55% today. Ideally, as the broader market hits new highs, both the advance/decline line and the percentage of stocks above their 50-day moving average would be rising, signaling a more broad-based and sustainable rally. This divergence suggests that a small group of stocks continue to make new highs and push the indices to record levels while there may be some underlying market weakness below the surface.



Source: FactSet

The rebound in equities since the April lows has been nothing short of historic in both strength and speed. From the close on April 8th through the end of last week, the S&P 500 has gained roughly 34%, marking one of the strongest short-term market rallies in recent history. Though, what is equally remarkable is the wide dispersion in returns across factors during this period. High beta and momentum have led the charge. The Invesco S&P 500 High Beta ETF (SPHB) has surged ~65% since the close on April 8th, while the Invesco S&P 500 Momentum ETF (SPMO) gained ~48% over the same period, signaling heightened risk appetite and an ongoing desire among investors to continue to pile into top-performing stocks. In contrast, more defensive factors such as quality and low volatility have lagged. The Invesco S&P 500 Quality ETF (SPHQ) is up just over 24% since the April lows, still very solid, but well behind the broader index. Meanwhile, the Invesco S&P 500 Low Volatility ETF (SPLV) has managed a modest 6% gain over the same period. This stark divergence highlights a market environment where investors have been rewarding riskier, high-growth names and largely shunning more stable, defensive plays. Such extreme factor dispersion is often seen in the later stages of market advances, when investor sentiment becomes increasingly optimistic and positioning more aggressive. This aggressive positioning is unfolding against the backdrop of historically elevated equity valuations.



Source: FactSet

The S&P 500 is currently trading at around 23 times forward earnings, concerningly above its long-term average of 16 times, according to FactSet. The S&P 500 has only been this expensive on a forward P/E basis during two other time periods since the turn of the century: at the peak of the tech and telecom bubble in 2000, and during the late 2020 to early 2021 speculative bubble in unprofitable technology stocks, meme stocks, and SPACs. On a price-to-sales basis, the S&P 500 is now more expensive than at any point in history. According to FactSet, the index is currently trading at a price-to-sales ratio of 3.32x, exceeding the previous peak of 3.25x set in 2021 and well above the 2.65x level reached during the 2000 tech bubble. High valuations, in and of themselves, do not necessarily portend a downturn is imminent. However, it is important to recognize the amount of risk embedded in the price of an asset when valuations reach unsustainably high levels. Over the long run, valuations matter… a lot. The price paid for an asset is one of the most important determinants of future returns. Historically, when market valuations have been this stretched, forward-looking returns for the major indices tended to be lower.



Source: FactSet

Updates & News*

While the previous discussion on elevated valuations centered on the broader market, it is important to recognize that not all stocks are trading at historically high or stretched valuations. At Tandem, our goal is to deliver a more consistent, repeatable, and less volatile investment experience for our clients. To achieve this goal, our rules-based, quantitative investment process is designed to identify companies that demonstrate consistent growth in sales, earnings, and cash flow throughout any economic environment. This disciplined approach results in a portfolio that often looks meaningfully different from the broader market. So, even in an environment where valuations at the index level and in certain pockets of the market are elevated, we continue to find attractive opportunities to deploy cash in individual stocks that meet our rigorous growth criteria.

New accounts and accounts with recent deposits that have been under Tandem’s management for a week are approximately 50% of the way invested in our strategies. By the one-month mark, new money is just under two-thirds of the way in line with our strategies, and by the three-month mark nearly three-quarters of the way invested.

Turning to portfolio news, Microsoft CEO Satya Nadella announced last week the company’s new Fairwater AI datacenter in Wisconsin is entering its final phase of construction. Nadella described the facility as what will be the “world’s most powerful datacenter” and “will deliver 10x the performance of the world’s fastest supercomputer today”. Microsoft also recently announced a 9.6% increase to its quarterly dividend, taking the payment up to $0.91 a share from $0.83. Elsewhere, BlackRock’s Rick Rieder is reportedly gaining traction as a potential candidate to become the next Chair of the Federal Reserve. Rieder, who serves as Chief Investment Officer of Global Fixed Income at BlackRock and has been with the firm since 2009, met with Treasury Secretary Scott Bessent in New York for a two-hour discussion on monetary policy, the Fed’s organizational structure, and regulatory policy. While President Trump has publicly mentioned Christopher Waller, Kevin Warsh, and Kevin Hassett as candidates under consideration, Bessent has indicated he plans to interview 11 candidates and will present President Trump with a shortlist of top contenders.

Source: Source of all data is FactSet, unless otherwise noted.

*The transition level activity taken by Tandem is applicable to new manager-traded accounts and new money in manager-traded accounts, not the composite or firm-wide level. New manager-traded accounts and new money in manager-traded accounts are not automatically invested on the first day. Rather, they are transitioned into our strategy over a longer time period that is dependent upon market conditions, this process differs from Tandem’s model-provided strategies, where money is invested on the day the account opens. Strategy level activity is applicable to the composite and action is taken at the firm-wide level.

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This audio/writing is for informational purposes only and shall not constitute or be considered financial, tax or investment advice, or an offer to sell, or a solicitation of an offer to buy any product, service, or security. Tandem Investment Advisors, Inc. does not represent that the securities, products, or services discussed in this writing are suitable for any particular investor. Indices are unmanaged and not available for direct investment. Please consult your financial advisor before making any investment decisions. Past performance is no guarantee of future results. All past portfolio purchases and sales are available upon request.

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