Kelly Hagans
Head Of Equity Strategy
Key Takeaways
High-quality stocks have dramatically underperformed lower quality stocks in 2025, echoing extremes last seen in 1999.
Despite near-record highs in the S&P 500, fundamentals are deteriorating beneath the surface as Free Cash Flow issues materialize in the Mag 7.
With nearly a third of the S&P500 trading at Price -to-earnings ratios (P/E) above 50x, FGRW may offer prudent risk-adjusted exposure if the tide turns.
The S&P 500 quality Index has lagged the S&P 500 by 8.9 percentage points over the last six months. The last time anything like this happened was in 1999 (figure 1).
By the way, we have a free cash flow problem in the six non-NVIDIA names of the Mag 7 (figure 3).
Figure 3: Total Free Cash Flow of Apple + Microsoft + Amazon + Alphabet + Tesla + Meta, Last 12 Months
The S&P 1500 has 30.9% of its market cap in stocks with price-to-earnings ratios (P/Es) above 50x reported earnings (figure 4).
Figure 4: S&P 1500 by Reported P/E Multiple
This makes figure 5 so intriguing. The S&P 500 Growth Index divided by the S&P 500 Value Index is at a multi-year moment of truth.
Figure 5: S&P 500 Growth Divided by S&P 500 Value
Oil is in the tank (see what I did there?), while Energy's S&P weight is down to 3.0%. If oil rallies due to AI demands on the electric grid, in our opinion, a lot of investors will basically miss it.
Figure 6: Crude Oil Divided by S&P 500: At 1998 and COVID-19 Levels
Of all my charts, figure 7 is the most troubling. From their recent highs, Carlyle (-26.2%), Blackstone (-25.8%) and KKR (-23.2%) have been badly clipped. The S&P 500 has barely backed off from the recent highs.
Figure 7: The S&P 500 Is Near Record Highs While Private Equity Breaks Down
By the way, we have a free cash flow problem in the six non-NVIDIA names of the Mag 7 (figure 3).
Figure 3: Total Free Cash Flow of Apple + Microsoft + Amazon + Alphabet + Tesla + Meta, Last 12 Months
