Michael Batnick and Ben Carlson host returning guest Matt Bartolini, Managing Director and Head of SPDR Americas Research at State Street Global Advisors, for their sixth or seventh appearance on the show. The conversation was recorded on January 21st during a period of notable market rotation.

The discussion centers on the current market dynamics showing the Mag 7 versus the S&P 493 ratio breaking down while the Russell 2000 versus S&P ratio breaks out, suggesting a broadening of market leadership. They explore whether this rotation represents a healthy development for the broader economy.

Key topics include market concentration concerns, the changing nature of dividend yields and shareholder returns, small cap outperformance drivers, and the sustainability of current market leadership. The conversation also touches on AI infrastructure spending, utilities benefiting from electricity demand, and the challenges facing active management in concentrated markets.

Market Rotation: Small Caps Breaking Out Against Mag 7

The Mag 7 to S&P 493 ratio is breaking down while Russell 2000 versus S&P is breaking out, signaling potential market broadening that's "bullish for the economy" - Bartolini

Small caps have outperformed large caps by 13% since late July when the Fed signaled more accommodative monetary policy and began cutting rates

Small cap earnings are now forecasted for double-digit growth in 2026, benefiting from lower rates reducing debt service costs and fiscal policy changes

The breakout coincides with monetary and fiscal policy impulses including the "One Big Beautiful Bill Act" and expense reduction changes benefiting consumer-oriented small caps

Active Management Struggles in Concentrated Markets

Only 31% of US large cap blend managers beat their benchmark last year with average underperformance of 200 basis points - Bartolini

"It's no great mystery why active has had a tough time. Most stocks have not beaten the benchmark because the benchmark gains have been concentrated in the biggest stocks" - Michael

The concentration of returns in the largest winners makes stock picking particularly challenging, explaining widespread active management underperformance

Dividend Yields Hit Historic Lows as Buybacks Dominate

S&P 500 dividend yield at 1.12% is near the historic low of 1.08% from the dot-com bubble, making equities poor income-producing assets

"Dividend yield is really not a great metric to utilize for valuation anymore because a lot of these companies don't pay dividends" - Bartolini

Companies have shifted to buybacks over dividends for shareholder returns, making "shareholder yield" a better valuation metric than dividend yield

The sector composition change from higher-yielding energy and utilities to lower-yielding tech companies explains much of the dividend yield decline

International Markets Outperform US in 2024

76% of non-US equity markets in the MSCI ACWI beat the US in 2024, the largest hit rate since 2009 with the largest average excess return since 2009

US equity ETFs received 74% of flows despite representing 80% market share, showing relative underperformance in flow capture

This represents a "broadening of geographical diversification" away from the 15-year "winniness trade" of US equities - Bartolini

Emerging markets are forecasted to have higher earnings per share growth in 2026 than US equities

Market Concentration: Historical Context and Future Risks

"Concentration has always been in the markets to some degree" with Spain and South Korea also showing high concentration at the top - Bartolini

Historical precedent shows leadership changes: "Exxon was the world's biggest" and "GE is no longer the largest company in the S&P 500" would shock previous generations

Current tech giants show vastly different growth trajectories: "Nvidia is forecasted to have 69% earnings per share growth. Microsoft is at 22%. Google's at 22%" - Bartolini

Scale by Geoffrey West suggests natural limits exist: "There is just a limit to how big buildings, organisms, companies can get before they just buckle" - Michael

AI Infrastructure Spending Creates New Market Dynamics

Tech companies have become "like industrials" with massive capital outlays for AI infrastructure that they're funding from cash flows

Utilities were up 13% last year and had second-most sector flows behind tech due to electricity demand from AI infrastructure

"All this electricity demand for AI could prove to be inflationary" creating complex market dynamics - Bartolini

The risk is whether tech companies will see returns on AI investments: "Unless they start getting a return on the investment, it's not always going to work like that" - Ben