Welcome to Five in Five, a monthly publication from the Investment Team at BTC Capital Management. Each month we share graphs around five topics that illustrate the current state of the markets, with brief commentary that can be absorbed in five minutes or less. We hope you find this high-level commentary to be beneficial and complementary to Weekly Insight and Investment Insight.

This month’s Five in Five covers the following topics:

1. Are Rate Cuts a Sure Thing?
2. Corporate Bonds – Overhyped and Overvalued
3. Small Cap Stocks Remain Relatively Undervalued
4. Mega-cap Stocks Trading at Relatively Higher P/Es
5. Payrolls and Job Openings

1. Are Rate Cuts a Sure Thing?

• The Bank of Canada and European Central Bank began cutting interest rates.
• Most assume this must mean the United States will follow suit with market implied cuts of 1-2 this year.
• In the last five cycles, the 10-year Treasury declined materially from its recent peak by the time the cut was announced.
• The median and average decline was about 180 basis points, while the smallest was 80 basis points.
• The current 10-year yield is down only 29 basis points from its recent peak.

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2. Corporate Bonds – Overhyped and Overvalued

• Corporate bond spreads remain near all-time lows.
• The current High Yield Corporate Bond Index spread is just 311 basis points over Treasuries.
• If spreads tick below the 2007 low, then high yield bonds are expected to return 5.5% more than Treasuries over one year.
• If spreads hit 800, a normal target during growth scares, returns would be 12% lower than Treasuries.
• Equities, with uncapped upside, appear to offer a better risk/reward.

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3. Small Cap Stocks Remain Relatively Undervalued

• In 2023, large caps (green line) outperformed small caps (blue line) (+27.2% versus +18.2%) and have also done so year-to-date (+12.5% versus +2.8%).
• Despite positive price appreciation over the last 17 months, small caps are currently trading below their five-year price-to-earnings (P/E) average.
• Large cap stocks are currently trading above their five-year average.
• Small caps remain relatively undervalued as investors continue to migrate to large cap stocks where lofty earnings growth expectations are expected to come to fruition.

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4. Mega-cap Stocks Trading at Relatively Higher P/Es

• The table above displays the average Next Twelve Months (NTM) P/E of stocks in the S&P 500 sorted by market cap size within deciles.
• When comparing companies that are relatively smaller in the S&P 500 to the large and mega-cap stocks, it is evident that the larger cap stocks are trading at a higher P/E multiple.
• Investors continue to migrate to the large and mega-cap stocks that are providing superior forecasted earnings growth and have thus far been able to deliver on lofty expectations.

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5. Payrolls and Job Openings

• The recent Job Openings and Labor Turnover Survey (JOLTS) release was below the consensus estimate by 300,000 job openings.
• The current reading is the lowest since February 2021 but still higher than pre-pandemic levels.
• The decline points to continued normalization of the labor market.
• Despite the decline in the JOLTS figure, the United States economy added a much higher than forecast 272,000 jobs in May.
• Continued strength in the labor market lowers the probability of a cut in the Fed Funds rate later this year.

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Sources: BTC Capital Management, Bloomberg, Institute of Supply Management, PSC Portfolio Strategy, FactSet
The information provided has been obtained from sources deemed reliable, but BTC Capital Management and its affiliates cannot guarantee accuracy. Past performance is not a guarantee of future returns. Performance over periods exceeding 12 months has been annualized.

This document is intended for informational purposes only and is not an offer or solicitation with respect to the purchase or sale of any security. Statements in this report are based on the views of BTC Capital Management and on information available at the time this report was prepared. Rates are subject to change based on market and/or other conditions without notice. This commentary contains no investment recommendations and you should not interpret the statement in this report as investment, tax, legal, and/or financial planning advice. All investments involve risk, including the possible loss of  principal. Investments are not FDIC insured and may lose value.