​Shortly after equities began rebounding in late 2022, the degree of outperformance between the Magnificent 7 and what Federated Hermes chief equity Strategist Phil Orlando called the Forgotten 493 has been nothing short of remarkable. It’s also unsustainable, Orlando told attendees last week at the Pershing INSITE conference.
By Orlando’s measure, the Magnificent 7 have climbed 117% since December 22, 2022, while the remaining members of the S&P 500, the so-called Forgotten 493, rose 18%. That’s a “two standard-deviation event,” he said, and one of only two where growth has outperformed value by such a wide margin.
The other similar events occurred in 1999 and in 2020 when stocks bounced back after the brief five-week Covid bear market. Orlando noted that correlation between Nvidia, which is up tenfold in the last two years, and Cisco, the darling of the dotcom era, are striking.
One of the psychological similarities in investor behavior today and 25 years ago was FOMO, the fear of missing out. However, Orlando did add that most of the companies in the Magnificent 7 are highly profitable; it's simply some of their price-to-earnings multiple that raise questions.
In contrast, the PE ratio for the Forgotten 493 is about 18, slightly high but far from outrageous. As of last week, Orlando said value stocks were trading at a 45% discount to growth stocks. Normally the discount is about 36%.
When U.S. stocks are compared to international stocks, he said, foreign equities are 41% cheaper. Historically, they trade at a 19% discount to domestic shares. The current relationship translates into “twice the discount and twice the yield” for foreign equities, he said.
Germany, Japan and the U.K. have all experienced mild recessions and appear to be “coming out of them,” Orlando said. In contrast, the U.S. is “slowing down.”
Orlando said Federated Hermes expects a 5% or 10% correction in the second and third quarters that could create a buying opportunity for a powerful rally in the fourth quarter after the election.