By Jonathan Baird – January 7, 2022

Perhaps the defining characteristic of the bull market of recent years has been its exceedingly narrow breadth, rivalled only by the markets of the 1920s, the “Nifty Fifty” era of the early 1970s, and the internet bubble at the turn of the century.

All but the most casual market observer will know that the current bull market has been led by the fabled FAANG stocks, plus Microsoft and a relative handful of other issues. The concentration of current leadership is so pronounced that the 6 largest companies in the S&P 500 represent an almost 30% weighting. Indeed, these mega-cap stocks have produced more than 50% of the index return by the S&P 500 in recent years.

An axiom of ours is that all market extremes should command investors attention, and this is no exception. The concentration of capital flows into very large-cap S&P 500 stocks has produced a two-tier stock market, with non-S&P 500 currently trading at their most attractive relative valuations in decades.

We hasten to add that attractive relative valuation does not necessarily equate to attractive absolute valuation. The current very richly priced S&P 500 means that relatively cheap may still not constitute a true bargain.

The timing of the next bear market is as uncertain as it is inevitable. History suggests that each successive bull market is led by different stocks than its predecessor.

The leaders of the next bull market that will present the greatest opportunities may well be found in the non-S&P 500 stocks that are currently being shunned by investors.

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