Investors often have a large-cap bias, but when markets are volatile, that bias can help investors navigate turbulent times. Of course, there are plenty of exchange traded funds with which to embrace large-caps, including the the SPDR S&P 500 ETF (NYSEArca: SPY), iShares Core S&P 500 ETF (NYSEArca: IVV) and Vanguard 500 Index (NYSEArca: VOO).
Some market observers are also concerned about the ongoing earnings recession in the S&P 500, with some projecting a 8% decline in first quarter earnings per share. However, investors should keep in mind that the earnings decline is largely due to the drag in the energy sector, which experienced a 60% decline in EPS for 2015 and is projected to record a record 70% decrease this year. Excluding energy, the S&P 500 earnings would have been up 6.8% in 2015 and could rise 3.1% in 2016.
“While market breadth, as measured by the commonly cited NYSE Advance-Decline Line has been strong as of late, when we drill deeper we can see where that strength has specifically been coming from. This chart shows the Advance-Decline Line for each market cap segment, large, mid, and small cap stocks,” according to See It Market.[related_stories]
Federal Reserve interest rate normalization has also weighted on the equity outlook. However, S&P 500 dividend yields of 2.2% remain well above 1.77% yield on benchmark 10-year Treasuries. Since 1953, the S&P 500 has expanded an average 19% in the following 12-month period when the dividend yield of the benchmark index was above 10-year Treasury yields, posting a positive return 80% of the time.
Financial entities like banks will benefit from expanding margins as rates climb. A rising rate environment may reflect a strengthening U.S. economy, and a healthier economy would help borrowers have an easier time repaying loans, with banks stuck with fewer non-performing assets. Moreover, rising rates means that banks will generate greater revenue from the spread between what they pay deposit savers and the prime rates they charge credit-worthy clients and other highly-rated debt.