Within the U.S. stock market, small-companies and value stocks have led the way for several years but a change of leadership may be near.
Back in 2000, all signs showed that large-cap stocks were overvalued, relative to small-caps. Since then, large-caps have trailed small-caps. Now, small-caps have gone up so much that it may be time for undervalued large-caps to outperform.
“Mega-cap” stocks, the largest U.S. companies, are selling at 20-year lows, relative to values in the overall stock market. The biggest companies not only offer good values, they have attractive balance sheets, dividends, and growth prospects.
Since 1999, value stocks have outperformed growth stocks so value stocks may be over-extended. Moreover, growth stocks tend to do well in late stages of an economic expansion.
If overall earnings growth slows from an estimated 12 percent in 2005 to 6-8 percent in 2006, as forecasters expect, companies that increase earnings by 10 percent-12 percent will look good. Altogether, then, large-cap growth stocks are likely to be the leaders in 2006.
