Big Difference Between Small-Cap and Large-Cap Valuations in the S&P 500

Looking at P/E ratios for companies in the S&P 500 ranked by market cap shows that large-cap companies are much more expensive than small-cap companies, see chart below.

Why are P/E ratios low for small-cap companies and high for large-cap companies?

Because Fed hikes and higher costs of capital are weighing on highly leveraged small-cap companies with low coverage ratios.

And the AI story has boosted valuations of mega-cap names.

With the Fed keeping interest rates higher for longer, and the AI narrative pushing valuations and index concentration to extreme levels, the downside risks to equities are growing.

Large-cap stocks are much more expensive than small-cap stocks — Source: Bloomberg, Apollo Chief Economist

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Flexibility Is Key: Why Invest Opportunistically in Private Credit

As private credit markets continue to expand, we believe that a flexible approach to investing in the asset class can benefit investors, especially in an environment where volatility is expected to remain elevated. We discuss this and more in our new white paper, “Flexibility Is Key: Why Invest Opportunistically in Private Credit.”

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Key Takeaways

Capital markets have, in our view, entered a new regime of higher volatility that, when properly managed, can create attractive opportunities for investors who are open to adding flexibility to private credit portfolios.
A flexible, relative-value based mandate can allow investors to allocate dynamically across the credit spectrum, capitalizing on opportunities that arise during different market regimes, especially periods of dislocation.
An opportunistic approach can lead to more diversified portfolios and, ultimately, potential higher risk-adjusted returns. In today’s environment, we see attractive opportunities to allocate among private corporate credit, asset-backed finance (ABF), and dislocated credit.
We see investors deploying flexible strategies alongside private credit, as a multi-asset class strategy, or as an “opportunistic” sleeve of credit portfolios.

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The information herein is provided for educational purposes only and should not be construed as financial or investment advice, nor should any information in this document be relied on when making an investment decision. Opinions and views expressed reflect the current opinions and views of the authors and Apollo Analysts as of the date hereof and are subject to change. Please see the end of this document for important disclosure information.

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This presentation is for educational purposes only and should not be treated as research. This presentation may not be distributed, transmitted or otherwise communicated to others, in whole or in part, without the express written consent of Apollo Global Management, Inc. (together with its subsidiaries, “Apollo”).

The views and opinions expressed in this presentation are the views and opinions of the author(s) of the White Paper. They do not necessarily reflect the views and opinions of Apollo and are subject to change at any time without notice. Further, Apollo and its affiliates may have positions (long or short) or engage in securities transactions that are not consistent with the information and views expressed in this presentation. There can be no assurance that an investment strategy will be successful. Historic market trends are not reliable indicators of actual future market behavior or future performance of any particular investment which may differ materially, and should not be relied upon as such. Target allocations contained herein are subject to change. There is no assurance that the target allocations will be achieved, and actual allocations may be significantly different than that shown here. This presentation does not constitute an offer of any service or product of Apollo. It is not an invitation by or on behalf of Apollo to any person to buy or sell any security or to adopt any investment strategy, and shall not form the basis of, nor may it accompany nor form part of, any right or contract to buy or sell any security or to adopt any investment strategy. Nothing herein should be taken as investment advice or a recommendation to enter into any transaction.

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Certain information contained herein may be “forward-looking” in nature. Due to various risks and uncertainties, actual events or results may differ materially from those reflected or contemplated in such forward-looking information. As such, undue reliance should not be placed on such information. Forward-looking statements may be identified by the use of terminology including, but not limited to, “may”, “will”, “should”, “expect”, “anticipate”, “target”, “project”, “estimate”, “intend”, “continue” or “believe” or the negatives thereof or other variations thereon or comparable terminology.

The Standard & Poor’s 500 (“S&P 500”) Index is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies by market value.

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Extreme Concentration in Returns in the S&P 500

Thirty-five percent of the increase in the S&P 500’s market cap since the beginning of the year has come from one stock, see the chart below. Such a high concentration implies that if NVIDIA continues to rise, then things are fine. But if it starts to decline, then the S&P 500 will be hit hard.

The bottom line is that the extreme concentration of returns in the S&P 500 makes investors more vulnerable to single headlines impacting the one stock driving index returns.

NVIDIA accounts for 34.5% of returns in the S&P 500 in 2024 — Source: Bloomberg, Apollo Chief Economist. Note: Calculated as share of market cap growth since January 1, 2024.

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The Pain in Real Estate Continues

It is remarkable how vacancy rates for commercial real estate are moving sideways or higher in a strong economy, see the first chart below. You would have expected that the ongoing strong growth in employment and GDP would push vacancy rates lower. If the Fed succeeds with slowing the economy down, then all these lines will move higher, and potentially very quickly.

Combined with the steep maturity wall for CRE, see the second chart, the bottom line is that the pain in office, apartments, and industrial real estate continues.