A Path of “Least” Resistance
Last quarter experienced numerous events which impacted global equity markets in various ways. Sentiment towards equities, specifically U.S. equities, ebbed and flowed seemingly with each day throughout most of the quarter. From “Liberation Day” to various geopolitical events, sentiment, and volatility shifted throughout the quarter.
Performance during the quarter exhibited a material shift within size, style and region. The U.S. gained traction during the quarter as the Russell 3000 Index advanced 11.0% which modestly lagged the 12.0% rise in the MSCI All Country World Index ex-USA (ACWI ex USA).
Regarding size, U.S. large cap companies notched a sizeable uptick during the quarter as the Russell 1000 Index increased 11.1%, outpacing the Russell 2000 Index, which rose 8.5%. Performance outside differed somewhat as the MSCI Emerging Markets Index modestly outperformed the MSCI EAFE Index, 12.0% versus 11.8%, respectively.
On a style basis, growth outperformed value within every region considered. Within the U.S., growth materially outperformed across the capitalization spectrum as the Russell 1000 Growth Index surged 17.8%, well above the 3.8% rise in the Russell 1000 Value Index. Similarly, small cap growth outpaced small cap value as the Russell 2000 Growth Index increased 12.0% versus the Russell 2000 Value Index, which rose 5.0%. This same phenomenon was exhibited outside the U.S. as the performance of MSCI EAFE Growth outpaced that of MSCI EAFE Value, 13.5% versus 10.1%, respectively.
Year-to-date foreign markets have outperformed domestic markets as ACWI ex-USA is up 17.9% while the Russell 3000 Index has risen 5.8%. Within the U.S., large caps have outpaced small caps as the Russell 1000 Index has outperformed the Russell 2000 Index, 6.1% versus -1.8%. The performance of foreign developed markets has exceeded emerging markets with MSCI EAFE outperforming MSCI Emerging Markets 19.5% versus 15.3%.
Continued Tailwinds or a Shift in Sentiment
We talk a lot about revenue and earnings growth, the sustainability of these two facets, coupled with valuation when developing our convictions related to investable markets and their underlying companies. Over the last few years, companies that exhibited sustainable to expanding growth in revenues and earnings and “quality” (e.g., high return on equity, return on invested capital and/or return on assets) were the predominant leaders in market performance.
Overall, year-to-date performance has been led by companies exhibiting high price momentum, specifically large cap companies that have liquidity (note the year-to-date outperformance of the Russell 1000 over the Russell 2000).
While it did during the second quarter, more strategists are questioning
the duration of the leadership of foreign markets given the run-up in valuations and the negative revisions ratio of analyst earnings estimates where downward revisions to forward earnings estimates exceed upward revisions.
A unique attribute of these companies may appear to be their exploitation of cutting-edge technology, specifically artificial intelligence. More so, most
of these companies exhibit sustainable to growing revenues, margins and earnings.
Given the relative outperformance by foreign markets relative to that of the U.S., one may ask if this is expected to continue. While it did during the second quarter, more strategists are questioning the duration of the leadership of foreign markets given the run-up in valuations and the negative ratio of analyst downward revisions to forward earnings estimates exceeding upward revisions. Projected earnings for U.S. companies, specifically large cap companies, currently exceeds that of foreign developed and the revisions ratio by analysts is positive, meaning upward revisions in earnings estimates are currently outpacing downward revisions.
In Summary
We remain cautiously optimistic regarding the opportunity within the equity asset class. Earnings growth is projected to be positive. Front of mind remains near-term geopolitical considerations. Valuations, specifically within the U.S., may be perceived as a headwind although sentiment regarding revenue and earnings growth going forward remains positive.
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.