Record High Equity Markets

Equities continued their upward trajectory for the first quarter, hitting record level highs. During the first quarter of 2024 the Russell 3000 gained 10%. Large cap stocks, as measured by the Russell 1000, gained 10.3%. Small cap stocks also rose to a lesser degree, gaining 5.2%.

On a style-orientated basis, Growth stocks, led primarily by the Technology sector, gained 11.4% for the quarter, outpacing Value stocks, which gained 9%. Interestingly, for the month of March, Value stocks outpaced Growth as investors rotated towards more value-orientated stocks.

The current equity rally is more broad based than 2023. Year-to- date, the group of stocks known as the Magnificent 7 contributed approximately 40% of the S&P 500’s returns, with the remaining 493 stocks contributing approximately 60% of the return. Last year, that number was reversed, with the Magnificent 7 contributing 60% of last year’s return. Currently, almost 90% of stocks in the S&P 500 are trading above their 150-day moving average.

Foreign developed markets gained 5.6% for the quarter. Of note, Japan’s Nikkei equity index reached a 34-year high this quarter after numerous so-called “lost decades” of stagnant economic growth. Foreign emerging markets underperformed developed markets, gaining 2.4% for the quarter.

The fourth quarter of 2023 earnings results for the S&P 500 came in relatively strong, posting a 10.1% year-over-year earnings growth rate. This was significantly higher than the 5% growth rate that was expected earlier in the year. 76% of companies reported earnings that beat analysts’ expectations with generally strong results across all sectors, with the Real Estate sector being the sole exception.

Inflation Remains Persistent

Inflation metrics recently released have remained persistently high. This
is casting some uncertainty as to the timing and number of rate cuts the Federal Reserve is expected to make in 2024. During the month of March, Value stocks significantly outperformed Growth stocks, a reversal from the long-term trend. Although one month does not constitute a long-term trend, investors moved into more value-orientated stocks during March as Value tends to outperform Growth in relatively higher interest rate environments. Investors continue to monitor economic releases for indications regarding potential Federal Reserve rate decisions.

Opportunities in 2024

We remain cautiously optimistic regarding United States equities into 2024. While valuations may appear lofty, with the S&P 500 currently trading at 20.9X next twelve months price-to-earnings (P/E NTM), we anticipate broad based continued earnings growth as has been demonstrated previously by
the market. When looking at valuations via forecast price/earnings to growth (PEG) ratio, valuations look much more reasonable as large cap stocks appear poised to continue to deliver reliable earnings growth. CY2023 earnings came in 4.1% higher than CY2022, which was higher than earlier estimates. CY2024 year-over- year earnings growth is expected to be approximately 10%, which is
more in line with long term earnings growth average, with Communication Services, Technology and Health Care stocks expected to contribute significantly. Given analysts’ earnings estimates and the market’s recent track record of strong earnings growth, we continue to view United States large cap stocks favorably.

Overseas, valuations are lower, with the MSCI EAFE Index currently trading at 14.3X NTM P/E. While appearing more attractive on a valuation basis, forecast earnings growth for international stocks is less than that forecast for United States stocks. Analysts are forecasting 5.3% year-over-year earnings growth for international stocks, significantly less than that of companies domiciled in
the United States.

Long-term Quality is Key

While there are currently many economic and financial indicators which appear to contradict each other, we continue to adhere to our proprietary process regarding stock selection. We focus on the companies who exhibit long-term quality metrics regarding sustainable earnings growth, above average returns on invested capital and relatively reasonable valuations. Additionally, our portfolio construction process is cognizant of how the stocks within the portfolio combine to effectively manage risk and capture relative upside returns. By remaining vigilant to this process, we are confident in our long-term ability to produce consistent risk-adjusted returns.

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 content is provided for informational purposes only and is not intended as 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 should not be interpreted 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.