Risk-Off Sentiment Prevails
Key Takeaways
- Fed maintains its rate posture.
- Momentum within equities wavers.
- Second quarter earnings surprise to the upside.
Risk-off sentiment prevailed over this past week. The Russell 3000 Index declined 2.3% while the MSCI All-Country World Index ex-USA fell 2.4%, diluted by the 5.7% decline in emerging markets. Bonds were flat over the past week.
Fed maintains its rate posture
On Wednesday, as expected, the Fed announced it would maintain the Federal Funds rate within a target range of 3.50% ─ 3.75%. Three of the 12 Federal Open Market Committee (FOMC) members dissented, more than anticipated, with the latter voting in favor of raising the target range by 25 basis points.
According to FactSet, markets currently price a probability of ~64% the Fed will raise its target range at its September meeting.
Momentum within equities wavers
“Momentum,” a factor driving equity performance, has come under pressure lately. According to MSCI, Inc., momentum is defined as high-price performance in the recent history, up to 12 months, with an expectation for continued high price performance over the near term, typically over the following six to 12 months. Year‑to‑date (YTD) the MSCI USA Momentum Index has advanced 14.4%, almost double the 7.6% return of the MSCI USA Index. Yet, momentum fell 10.2% over the last week versus the broader index’s decline of 2.3%.
Seven of the top 10 constituents of the Momentum Index are companies within the Information Technology sector, for which valuations have compressed given ongoing questions revolving around AI, related capex spending, circularity, and the expectation for a return on investment related to AI spending. According to FactSet, the Information Technology sector experienced a drawdown of 12.0% over the last week.
Second quarter earnings surprise to the upside
According to the London Stock Exchange Group (LSEG), approximately 28% of the companies comprising the MSCI USA Investable Market Index, a broad measure of large, mid and small cap segments of the U.S. market, have reported year‑over‑year (YOY) earnings growth of 58.3%. Analysts estimate earnings growth of 18.5% YOY for companies yet to report. When blending these two metrics, analysts project earnings growth of 35.4% YOY for the second quarter.
When considering the MSCI All-Country World Index ex-USA, a broad measure of foreign developed and emerging companies, approximately 78% companies have reported earnings, exhibiting growth of 22.7% YOY. The estimated earnings growth for companies yet to report stands at 34.0%, resulting in a blended rate for the index of 30.6% YOY.
 |
 |
Sources: BTC Capital Management, FactSet Research Systems, Inc., LSEG I/B/E/S, FTSE Russell (an LSEG Company), MSCI Inc. The Federal Reserve
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.