Since May 2017, the S&P 500 has achieved a 14.3% annualized total return, with a significant portion (4.6 percentage points) stemming from valuation expansion, particularly among the largest stocks. The remaining return came from dividends and free cash flow growth. Distillate’s U.S. FSV strategy, which has nearly matched the S&P 500’s performance over this period, did not benefit from this valuation expansion. Instead, its net-of-fee returns were driven by superior underlying free cash flow growth, primarily due to systematically rebalancing into less expensive stocks. VIEW/DOWNLOAD

Uncertainty related to tariffs, AI, and the sustainability of federal spending are all creating significant investor unease and market volatility/weakness.  While there is much that is unique to the current environment, we do see many parallels to both the macroeconomic and market backdrop of exactly 25 years ago.  As we again enter uncertain times, we are optimistic that the combination of a valuation discipline and quality measures may again prove highly differentiating as was the case back then. VIEW/DOWNLOAD

A disconnect between prices and fundamentals is being driven mostly by just a handful of the largest stocks.  Given their enormous weight in the broad benchmarks, the overall market has become much more expensive and there looks to be considerable valuation risk for large U.S. stocks in aggregate as a consequence. VIEW/DOWNLOAD

Large cap U.S. stocks in aggregate look expensive.  This is primarily a function of current market leadership, where the 15 most expensive companies over $250 billion in market cap are collectively trading at a 72% premium to the rest of the market.  The situation appears similar to the one in March, 2000, when the overall market was even more expensive, but a set of opportunities below the surface provided good absolute returns, even as the TMT bubble collapsed. We take a harder look at the market now versus 2000 in our letter. VIEW/DOWNLOAD