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. Bond Market Tracking Growth Outlook
2. Corporate Bonds Remain Resilient
3. Magnificent 7 Underperforming Broad Market Quarter-to-date
4. Large Cap Value Outperforms in August
5. United States Continues to Lead Global Markets

1. Bond Market Tracking Growth Outlook

• 2-year Treasury yields have been tracking economic surprises for the past 12 months.
• This makes sense with the Fed reaction function also based on recent economic data releases.
• The bond market is pricing in nine cuts to the Federal Funds rate by the end of 2025.
• This magnitude of cuts is unlikely unless the Citigroup Economic Surprise Index breaks down toward -80.
• If the surprise index drifts back toward zero, we are likely looking at higher rates and an unwinding of the implied cuts.

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2. Corporate Bonds Remain Resilient

• Corporate bond spreads bounce back after the Japanese tremors.
• We already have established a higher high and higher low since spreads bottomed in May.
• Corporate bond spreads continue to lag equity markets in both directions.
• The risk-reward ratio remains poor with spreads near historical tights.

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3. Magnificent 7 Underperforming Broad Market Quarter-to-date

• Since June 30 of this year, the group of stocks known as the Magnificent 7 (Mag 7) has underperformed the S&P 500.
• The Mag 7 was previously responsible for the lion’s share of the market’s price gains and earnings growth.
• Year-to-date, however, the Mag 7 has outperformed the S&P 500 (+26% versus +13%).
• Investors have recently adopted a “risk-off” mentality as lofty valuations and mixed economic signals have created doubt regarding near term potential market gains, especially regarding mega-cap tech stocks.

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4. Large Cap Value Outperforms in August

• For the month of August, large cap Value stocks outperformed all other style/size categories.
• Small cap Growth stocks were the worst performing style/size category in August as investors rotated out of small cap stocks and into more “safe harbors” as fears of weakening economic conditions weigh on investors.
• Lofty price-to-earnings (P/E) valuations and concerns regarding potential earnings growth, particularly of technology stocks, drove investors to sectors with relatively lower valuations such as Real Estate and Utilities, which outperformed the broad index in August.

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5. United States Continues to Lead Global Markets

• Year-to-date, United States equity markets have outperformed other global equity benchmarks.
• Forecasted earnings growth for United States equities outpace other regional earnings growth rates.
• Several equity markets in the Eurozone have shown positive performance as that region’s economy has improved, with forecasted positive Gross Domestic Product (GDP) growth and lower inflation metrics.
• China’s equity market continues to lag as consumer spending in that country has not recovered.

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Sources: BTC Capital Management, Bloomberg, FactSet, PSC Portfolio Strategy, LSEG Datastream
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.