Stocks of large U.S. companies may outperform small-cap companies in the fourth quarter — MarketWatch
In the United States, large-cap stocks have a seasonal tendency to outperform small-cap stocks in the fourth quarter, MarketWatch reports. According to the long-term data cited by the publication, the relative advantage of small companies is usually greatest in January, gradually declines throughout the year, and becomes negative in the final three months.
Seasonality, rates and uncertainty
The author notes that the relative performance of the small-company segment may be affected not only by seasonal factors. Higher yields on 10-year U.S. government bonds correlate with lower relative returns for small-company stocks. According to the article, a similar relationship is observed as the economic policy uncertainty index rises.
At the same time, even after accounting for interest rates and economic uncertainty, large companies tend to show relative strength at the end of the year, according to the author’s data. This pattern is also evident in the second half of the century-long sample, which, in the author’s view, increases the statistical reliability of the trend.
Incentives for asset managers
A possible explanation for this dynamic is the compensation system for asset managers, according to research by Kennesaw State University finance professor Lucy Ackert and University of Western Ontario professor George Athanassakos. In a 2003 paper updated in 2023, the researchers concluded that managers are more likely to take on the higher risk of small companies in January, while increasingly favoring large companies closer to the end of the year.
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The author links this to the fact that managers outperforming the S&P 500 in year-to-date returns may be interested in locking in their results before receiving an annual bonus. To do so, they may shift portfolios from small-company stocks to large-company stocks, which dominate the S&P 500 index.
Companies on MarketWatch’s list
The list of companies with market capitalizations of at least $100 billion that are included in the S&P 500 and recommended by at least two investment newsletters whose performance is tracked by Hulbert Ratings included Nvidia, Apple, Alphabet, Microsoft, Amazon, Broadcom, Meta Platforms, JPMorgan Chase, Bank of America, Lam Research, Morgan Stanley and Goldman Sachs.
The list also includes Thermo Fisher Scientific, Charles Schwab, Abbott Laboratories, Walt Disney, ConocoPhillips, Pfizer, Bristol Myers Squibb, Capital One Financial, CVS Health, Lockheed Martin, Medtronic, Lowe’s, Bank of New York Mellon, Constellation Energy and Adobe.
