Equity Performance Review
Equity markets continued their rise during the second quarter. U.S. equities advanced 8.2% as large caps outpaced small caps 8.5% versus 4.3%. Within large caps, growth surged 11.9%, doubling the 5.2% exhibited by value. Small caps were a different story, as value rose 4.6% modestly outperforming growth which rose 3.9%.
Outside the U.S., foreign equities increased 5.5% as developed markets returned 5.7%, modestly outperforming the 5.1% of emerging markets.
Year to-date, U.S. equities returned 15.1% while foreign equities advanced 9.2%.
Volatility (or lack thereof)
Recall we stated in our Q4 2020 Equity Commentary our anticipation of “somewhat higher volatility.” Volatility represented by the CBOE Volatility Index (VIX) has at times during 2021 ratcheted higher only to retrace. During the second quarter, this measure spiked higher during mid-May only to close the month and subsequently the quarter at year-to-date lows. At 15.8, the VIX is currently below its 10-year average of 17.4, with its trend pointing lower. That said, given our outlook going forward, we continue to anticipate choppy equity markets thus some degree of volatility.
This was demonstrated in the number of new highs exhibited by equity indexes year to date. The MSCI USA Index exhibited new highs 36 times, 22 of which occurred during the second quarter. The last five trading days of the quarter saw this index close at record highs. Outside the U.S., the MSCI All Country World ex-USA Index (MSCI ACWI x-US) has experienced 28 new highs year to date.
Revenue and Earnings Estimates
Analyst optimism continues concerning both corporate revenues and earnings. For calendar year 2021, analyst estimates for year-over-year (YOY) revenue and earnings growth of domestic companies are at 12.6% and 33.7%, respectively. For foreign companies, analysts project revenues and earnings to grow YOY by 5.3% and 40.2%, respectively.
For calendar year 2022, analysts remain positive regarding growth in both revenues and earnings. Within the U.S., analysts project YOY growth in revenues and earnings at 6.2% and 10.4%, respectively. Outside the U.S., YOY growth in both revenues and earnings are projected at 4.3% and 9.2%, respectively.
Overall, analyst sentiment concerning earnings via revisions remains positive. Upward revisions continue to outpace downward, although the rate of change in upward revisions appears to be plateauing.
Valuations and Other Observations
Equity valuations continue to appear stretched when considering the price-to- earnings ratio (P/E) of broad market indexes. Within the U.S., the P/E for the MSCI USA Index over the trailing 12 months (TTM) stands at 29.7x, well above its historical 10-year average of 20.8x. Similarly, the valuation of foreign equities, as represented by the P/E TTM of the MSCI ACWI x-US Index, appears extended given its P/E TTM of 21.8x versus its historical 10-year average of 16.1x.
When considering analyst estimates over the next 12 months (NTM), valuations for both domestic and foreign equities are moderate yet remain above historical averages. For the U.S. index, the P/E NTM projects at 22.2x, below that of its TTM but above its historical average. Likewise, for the foreign index, its P/E NTM of 15.5x is below its TTM but above its historical average.
One may ask; is there upside opportunity within equities? We believe so. Globally, both fiscal and monetary policy appear geared to sustain economic expansion. Interest rates appear rangebound and although we anticipate volatility within forward rates, we do not anticipate rates will present a headwind in the near future.
The latter points plus the expectation of double-digit earnings growth warrant a constructive view of equities. Since 1990, when YOY earnings growth exceeds 10%, equity markets have delivered positive returns.
As equity markets have advanced through the first half of 2021, we believe it prudent to anticipate some waning in future performance in the coming months. A crucial tenet of our process is risk management; thus we continue to scrutinize the capital markets with a readiness to adapt our equity outlook.
Source: BTC Capital Management, Bloomberg LP, Ibbotson Associates, FactSet, Refinitiv.
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.
The information within this document is for information 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 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.