Equities Continue Their Ascent
Equity markets continued their year-to-date (YTD) rise during the second quarter, building off the strong performance exhibited during the first quarter. U.S. equities advanced 8.4%, driven by large caps which rose 8.6% while small caps rose 5.2%. Foreign equities modestly increased 2.4%, lagging the performance of domestic equities. Developed markets advanced 3.2% while emerging markets ticked up 0.9%.
Growth continued its relative performance over Value. Domestically, Growth outpaced Value 12.5% versus 4.0% during the quarter and 28.1% versus 5.0% YTD. This same phenomenon was observed in the YTD performance of foreign equities as Growth outperformed Value 10.9% versus 8.8%, respectively.
Domestic equities have risen 16.2% while foreign equities have advanced 9.5% YTD.
Growth Style-Orientation First Half
Why is there dispersion in performance between companies characterized as Growth versus those characterized as Value? Historically, growth-oriented companies outperform value-oriented companies during times of perceived financial stress as growth oriented companies present the opportunity for stability in revenues and margins, thus profitability.
Consider the S&P 1500, a broad domestic all-cap index. Companies within the Information Technology sector comprise 26.7% of this index, many of which are defined as “growth”. Year-over-year growth in earnings-per-share (EPS) for this sector is projected to increase 16.0% during calendar-year 2024 (CY2024) and 10.0% for CY2025. Companies within this sector have delivered relative outperformance YTD as exhibited by Apple (+49.7%), Microsoft (+42.7%), Nvidia (+189.5%), and Broadcom (+57.1%) versus the index return of 16.2%.
While growth-oriented stocks have driven YTD performance, the breadth or number of companies contributing has been very narrow. Information Technology is one of the largest, if not the largest, sector within broad domestic indexes and many of the companies within this sector are identified as “growth”. When considering the S&P 1500, the four companies mentioned above represent 14.5% of this index and account for 37.9% of its YTD return. Note that this sector is a smaller component of developed market indexes outside the U.S.
Earnings quality, or a company’s ability to sustain earnings, is a key concept. Interestingly, the estimated CY2024 EPS growth of Microsoft (+15.2%) and Nvidia (+37.3%) exceed that of the S&P 1500 (+11.9%), while sustainability may be the factor of sentiment driving both Apple and Broadcom, whose estimated CY2024 EPS growth are 10.2% and 8.4%, respectively.
Second Half – Same as the First?
We do not believe in chasing returns. The “fear of missing out”, or FOMO, has also been evident in the YTD performance of U.S. equities. What may we expect regarding forward earnings growth and opportunity?
For the Russell 3000 Index, analysts estimate EPS growth of 13.0% for CY2024 and 12.3% for CY2025. Given this index’s forward price-to-earnings (P/E) ratio of 18.6x (versus a historical average of 15.6x over the last 20 years), equities may appear expensive.
Likewise, for the MSCI All-Country World Index ex-USA, analysts estimate EPS growth of 10.2% for CY2024 and 8.7% for CY2025 which, at a forward P/E of 12.9x (versus a historical average of 13.1x over the last 20 years), may appear opportunistic.
Opportunity in the second half of 2023 exists in companies that exhibit factors like that discussed above, such as earnings quality at an attractive valuation. An acronym that may sum this up is GARP, or “growth at a reasonable price”. And this factor approach is not limited to Information Technology exclusively as opportunity exists in companies in various sectors and geographical regions.
Markets are forward-looking, fluid, and uncertain. Our proprietary process emphasizes risk management and is dynamic, such that we stand ready to act on any near-term catalysts that may offer opportunity to reduce risk or enhance return concerning the companies we own within our proprietary strategies.
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.
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