My kids discovered Google Finance whilst we were waiting to board a flight home from Ho Chi Minh last week. They were fascinated by the growth of the footwear company, Crocs (CROX), and were comparing its share price growth to that of other major companies they know of - Netflix, Microsoft, Google, Tesla, Apple, and so on.
I asked them, why do you think their share price has gone up so much? We spent a few minutes recapping why businesses exist and why people invest in businesses. They eventually nailed it - to make money, they said.
Why do you think the world's largest companies have been performing so well of late? Is it hype? Is it speculation? Is it (was it) low interest rates? Maybe. And why is it that small and mid-cap stocks haven't performed anywhere near as well? High interest rates? Maybe. The one thing I can tell you for certain that is driving the performance of these stocks, is their earnings and profitability.
Here's the S&P 500 in purple, the Russell Mid Cap Index in orange, and the Russell 2000 in blue. The smaller the capitalisation of the company, the lower the returns.
Here's why - 42% of companies in the Russell 2000 have negative earnings. For the mid-cap index, the number is 14%, and for the S&P 500, it is 6%, see chart below (thanks to Torsten Sløk, Apollo Chief Economist).
Sometimes the simplest explanation is the best one.