Yesterday's Sector Laggards are Today's Leaders

April 24, 2023 |
2 minute read
|

Much to the surprise of market participants, global stocks have risen at an impressive pace year to date despite significant macroeconomic headwinds and regional bank troubles. In what can be deemed a “market reversal” last year’s laggards have been this year’s leaders driving equity market performance as seen in this Chart of the Month.

2022 was a story of high growth sectors such as Information Technology and Communications suffering in the face of steep interest rate hikes and dampening expectations for future earnings. In the 1Q2023, signs of moderating economic activity, declining inflation, and hopes of a Fed pause drove performance for those sectors and led to a broad change in S&P 500 leadership.

Large cap growth stocks led the way in the U.S. as the Russell 1000 (7.46 percent) outperformed the Russell 2000 (2.74 percent) by almost 500 basis points as large cap growth names outperformed their small cap counterparts by 8.30 percent. The top 10 performing positions were widely distributed amongst sectors including consumer discretionary, health care and industrials. However, three index behemoths sat at the top of the leadership. Nvidia, Meta and Tesla were the top performers with returns of 90 percent, 76 percent, and 68 percent, respectively. Eight of the bottom 10 performers were in the financial sector.

The FAANG +M1 contribution to performance was outsized for the first quarter accounting for 61 percent of the S&P 500 returns: 4.57 percent out of 7.50 percent. When adding NVIDIA and Tesla, the contribution rises to more than 6 percent of the index total return. The large contribution to performance from this basket of names also explains the growth heavy NASDAQ 100 having its best 1Q performance since 2012, returning 20.8 percent. This has resulted in the S&P 500 looking more concentrated again, with these names comprising 21.3 percent of the benchmark index versus 18.3 percent at the end of 2022. If we include Tesla and Nvidia the concentration is almost 25 percent of the S&P 500. This same group within the MSCI ACWI only comprise 13 percent of the index and accounted for 41 percent of the 1Q2023 return.

It remains to be seen if these trends in the equity markets are sustainable as 2023 progresses. However, significant headwinds suggest that the continued strength in the equity markets will be hard to maintain. Thus far, corporate earnings for 1Q2023 have been positive but less than 10 percent of S&P 500 companies have announced results. Prior to the end of the 1Q2023, the highest number of S&P 500 companies issued negative earnings guidance for a quarter since 3Q2019. Overall, this does not bode well for the outlook for equities but does align with the economic backdrop as corporations struggle to maintain operating margins in a slowing economy.

CHT1-Yesterdays-Laggards-are-Leaders

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  1. FAANG+M references a basket of stocks including Facebook, Amazon, Apple, Netflix, and Google (Alphabet) + Microsoft.
Ryan Driscoll

Author

Ryan Driscoll

Managing Director

Ryan Driscoll

Author

Cameron Dyer

Disclaimer

Certain information contained herein has been obtained from or is based on third-party sources and, although believed to be reliable, has not been independently verified. Such information is as of the date indicated, if indicated, may not be complete, is subject to change and has not necessarily been updated. No representation or warranty, express or implied, is or will be given by The Common Fund for Nonprofit Organizations, any of its affiliates or any of its or their affiliates, trustees, directors, officers, employees or advisers (collectively referred to herein as “Commonfund”) or any other person as to the accuracy or completeness of the information in any third-party materials. Accordingly, Commonfund shall not be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on any statement in, or omission from, such third-party materials, and any such liability is expressly disclaimed.

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To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated herein. Forecasts of experts inevitably differ. Views attributed to third-parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Market and investment views of third-parties presented herein do not necessarily reflect the views of Commonfund, any manager retained by Commonfund to manage any investments for Commonfund (each, a “Manager”) or any fund managed by any Commonfund entity (each, a “Fund”). Accordingly, the views presented herein may not be relied upon as an indication of trading intent on behalf of Commonfund, any Manager or any Fund.

Statements concerning Commonfund’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Fund. Such statements are also not intended as recommendations by any Commonfund entity or any Commonfund employee to the recipient of the presentation. It is Commonfund’s policy that investment recommendations to its clients must be based on the investment objectives and risk tolerances of each individual client. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund. Commonfund disclaims any responsibility to provide the recipient of this presentation with updated or corrected information or statements. Past performance is not indicative of future results. For more information please refer to Important Disclosures.

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Disclaimer

Certain information contained herein has been obtained from or is based on third-party sources and, although believed to be reliable, has not been independently verified. Such information is as of the date indicated, if indicated, may not be complete, is subject to change and has not necessarily been updated. No representation or warranty, express or implied, is or will be given by The Common Fund for Nonprofit Organizations, any of its affiliates or any of its or their affiliates, trustees, directors, officers, employees or advisers (collectively referred to herein as “Commonfund”) or any other person as to the accuracy or completeness of the information in any third-party materials. Accordingly, Commonfund shall not be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on any statement in, or omission from, such third-party materials, and any such liability is expressly disclaimed.

All rights to the trademarks, copyrights, logos and other intellectual property listed herein belong to their respective owners and the use of such logos hereof does not imply an affiliation with, or endorsement by, the owners of such trademarks, copyrights, logos and other intellectual property.

To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated herein. Forecasts of experts inevitably differ. Views attributed to third-parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Market and investment views of third-parties presented herein do not necessarily reflect the views of Commonfund, any manager retained by Commonfund to manage any investments for Commonfund (each, a “Manager”) or any fund managed by any Commonfund entity (each, a “Fund”). Accordingly, the views presented herein may not be relied upon as an indication of trading intent on behalf of Commonfund, any Manager or any Fund.

Statements concerning Commonfund’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Fund. Such statements are also not intended as recommendations by any Commonfund entity or any Commonfund employee to the recipient of the presentation. It is Commonfund’s policy that investment recommendations to its clients must be based on the investment objectives and risk tolerances of each individual client. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund. Commonfund disclaims any responsibility to provide the recipient of this presentation with updated or corrected information or statements. Past performance is not indicative of future results. For more information please refer to Important Disclosures.