Investors Lean Toward Large-Caps

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.

Related: Financial Sector ETFs Maintain Momentum

“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.


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.