Research & Insight

Navigating challenging market conditions requires an understanding of how different asset classes, investment styles, and sectors perform during periods of heightened volatility. While traditional defensive assets like Treasuries have provided protection in some downturns, their effectiveness has been inconsistent. Hedged-equity strategies that hold stable, reasonably-valued, high-quality stocks — particularly weighted toward defensive sectors like Consumer Staples and Healthcare, can be particularly useful to investors during periods of market loss and heightened volatility.

The strong performance of large-cap stocks over the past decade has left the market exceptionally top-heavy. By some measures, stock market capitalization has never been more concentrated among a handful of large stocks as today. Following periods of high market concentration, stock market returns are not only low over the subsequent decade, on average, they also tend to be highly volatile. Taken together, these characteristics – losses for Mega-Cap stocks, strong relative returns but low absolute returns for Non-Mega Cap stocks, and lots of market volatility – offer a potentially overlooked benefit for long-term investors choosing how to structure their portfolios.

The heady optimism in forecasted earnings is hiding in aggressive expectations for profit margins. The rise in market valuations has been much more tightly linked to those elevated margins - and expectations for even higher margins next year and the year after - than investors may realize. If the widely held belief that public companies will perpetually become more profitable begins to falter, the steep valuation premium that has been priced into U.S. large-cap stocks over the past decade may evaporate.