Quarter in Review

Global equity markets continued to be led by the United States during the second quarter. Domestic equities, measured by the Russell 3000 Index, rose 3.2%. This was driven exclusively by Growth, which fully offset the downturn in Value (+7.8% versus -2.3%, respectively). Large cap continued its dominance over small cap, with the Russell 1000 Index advancing 3.6% versus a decline of 3.3% in the Russell 2000 Index.

Foreign equities rose as the MSCI All-Country World Index ex-USA (ACWI ex-USA) advanced 1% during the quarter. Somewhat different from the United States is that Value outperformed Growth, 1.3% versus 0.7% respectively. Foreign developed markets, measured by MSCI EAFE, exhibited a modest decline of 0.1% while the MSCI Emerging Markets Index surged 5%, fueled by China and India, and rose 7.1% and 10.21% respectively.

Year-to-date, the United States continues its lead as the Russell 3000 Index has advanced 13.6% which is double the return of 5.7% exhibited by ACWI ex-USA. The question remains; will the United States continue its leadership over the second half of 2024?

“Factoring” in Performance

Within the investment industry, a “factor” is a specific identifiable driver of return. According to MSCI Inc., during the second quarter the best performing factor within the United States was Quality (e.g., companies exhibiting high return on equity, stable year-over-year (YOY) earnings growth and low financial leverage) which returned 5.4%. Historically, Quality has been the best performing factor.

Our equity strategy parameters incorporate this factor, expressed as the ability of a company to sustain or enhance revenues, margins and earnings relative to peers.

According to the London Stock Exchange Group (LSEG), for the third quarter analysts estimate YOY growth in earnings per share (EPS) of 8.6% for the S&P 500 Index. Analysts currently project YOY EPS growth greater than the benchmark rate within four of 11 sectors (Health Care +17%, Information Technology +15.4%, Communication Services +11.8% and Industrials 10.4%). Recently, Growth in EPS has been clustered in technology oriented industries, specifically within Information Technology (the largest sector within the Index) and Communication Services.

For the Russell 2000 Index, analysts are more optimistic estimating EPS growth of 35.3%. Sectors exhibiting outsized estimated YOY EPS growth include Communication Services +130.6%, Health Care +33.7%, Industrials +26.4% (the largest sector), Information Technology +23.1% and Consumer Staples +20.7%.

Valuation is also a key “front of mind” concept for our firm. According to FactSet, the S&P 500 Index currently trades at a price-to-earnings (P/E) ratio of 26.4x trailing 12-month EPS (TTM) versus a 10-year historical average of 18x. When looking over the next 12 months (NTM), its projected P/E NTM is 21.1x versus a historical average of 16x. While the current valuation of United States large caps may seem inflated, estimated EPS growth appears sustainable within this asset class. Given the estimated EPS growth for this index, its price-to-earnings growth (PEG) ratio stands at 1.6.

United States small caps exhibit a differing mix of both EPS growth and valuation. Via FactSet, the P/E TTM for the Russell 2000 Index is 16.1x with a P/E NTM of 15.6x. Given its estimated EPS growth, this Index bears a PEG ratio of 1.2.

Outlook

Our fourth tenet is to “Practice Risk- Aware Portfolio Construction.” With that being said, risks are on the horizon. In addition to the risks Jon highlights in our Economic and Market Overview, any disappointment in earnings reports, corporate guidance and/or a scenario where interest rates remain higher for longer may create potential headwinds.

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.