June Markets in Focus

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Markets in Focus

Timely analysis of market moves and sectors of opportunity

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June 24, 2024: Positioning in this hated bull market

Key points

The market is set to report strong performance for the first half of 2024, but skeptical investors remain on the sidelines.
Weaker economic data partly reflects the lagging impacts of monetary policy, and investors have expected the U.S. economy to moderate from its robust post-COVID pace.
Periods where the market is overbought at an index level — like the one we’re in now — have previously lasted for long stretches of time.

The market looks set to notch a strong first half of the year. The S&P 500 Index’s year-to-date return is more than 15%.¹ Inflation is finally starting to provide reasons to be optimistic that the recent moderation is sustainable, and consequently 10-year U.S. Treasury yields have come down 45 basis points from their peak in April. Earnings growth has also exceeded expectations for the last two quarters, and global growth has been better than feared.

“Given this positive backdrop, it’s fair to ask why there are still so many skeptical investors sitting on the sidelines,” said Matt Orton, CFA, Chief Market Strategist for Raymond James Investment Management.

Some of the hesitancy may be due to concerns about narrowed market breadth. The S&P 500^® Equal Weight Index is up only 5.5% year to date, underperforming its capitalization-weighted counterpart by nearly 10%. The top five companies in the S&P 500 Index have contributed 100% of its quarter-to-date gains, and only 27% of S&P 500 Index constituents are outperforming the index quarter to date. Weakness also is appearing in cyclical leaders such as industrials, financials, and materials. “Any signs of widening market breadth that we saw during earlier earnings seasons have been eroded recently,” Orton said.

“There are important concerns that shouldn’t be ignored, but there’s no reason to expect the general trend of narrowness to reverse suddenly,” he said. He added that market environments like this one have previously lasted for long periods, and it will be important to see how this narrowness reverses.

“Sure, the S&P 500 could lag while the equal-weighted index could surge,” Orton said. “But they could both go nowhere for a while. Or they could both continue to do well, but surging breadth could take over and help lagging stocks improve their performance.” He said that the market doesn’t have to crater for breadth issues to be resolved.

Internals aren’t great, but they’re not that bad
S&P 500 Index year-to-date

Source: Bloomberg; as of 6/22/24.

“For the skeptics out there, it’s certainly OK to believe that we’re approaching some sort of mean reversion or normalization,” Orton said, “but don’t let that obscure the broader backdrop in which we’re operating.” He believes that markets are overdue for some sort of consolidation, and the extreme dislocations that internals have experienced over the past few weeks have the potential to normalize.

“Any consolidation should be viewed within the context of a bull market,” he said. “In fact, it’s high time that more investors started believing that we’re indeed in a bull market, and missing bull markets is incredibly expensive.”

Orton said there are opportunities for investors to find value in pockets of the market. Within the bull market context, he believes that downside shouldn’t be viewed as something that needs to be avoided at all costs — rather, it should be embraced as an opportunity to consider putting capital to work at more attractive levels.

“I believe in staying invested when the economy is strong; that’s how you build wealth,” he said. “There are still too many skeptics out there to say we’re at or near peak optimism.”

Some skeptics have pointed to weaker economic data as a harbinger of something much worse. “While U.S. economic data has indeed slowed of late, I view this as a cooling rather than deterioration,” Orton said. “To be sure, the “May’s Advance Monthly Retail Trade Survey indicated some belt-tightening among consumers, but in the big picture, recent data shows personal consumption remains healthy and back to tracking its pre-pandemic trend in inflation-adjusted terms.”

Orton said that a moderation from the robust economic reports that followed the COVID recession has been expected for quite a while, and it partly reflects the lagging impacts of monetary policy and inflation. “High interest rates and inflation disproportionately impact lower-income households, which mainly spend on goods,” Orton said. “Conversely, higher-income households have pushed spending on services above the pre-pandemic trend.” He expects that increased services activity will continue to support growth in consumer spending this year, or at least help it avoid becoming problematic for the economy or market.

“We certainly do need to monitor leading indicators to gauge whether a more severe downturn in consumer spending might be coming down the road,” Orton said. These indicators include the labor market details revealed by the Conference Board when it shares its survey results on Tuesday. “Although survey participants have noted that jobs are less plentiful, they are still not hard to get,” he said. Orton’s base case is for this to continue, which could corroborate messages from other labor market data released this month: A job market that is rebalancing, but not falling apart.

Orton’s investment playbook

Orton said some of the short-term extremes in the market suggest it’s more likely than not that we will see some consolidation earlier this summer. “I expect we’ll see some rotation beneath the surface and some real money coming back into the market that is focused on the underlying fundamentals instead of chasing momentum,” he said.

Sticking with momentum…for now. The biggest winners at present have been the top contributors to the market since late 2022, but Orton said that other companies have also been big winners without making the same outsize impact on return contributions due to their smaller market capitalization. “Take a look at the list of stocks in your favorite momentum factor exchange-traded fund right now, and you’ll see that they’re all high-quality companies,” he said. “Momentum underperformed last week and might remain a bit shaky into the quarter-end rebalance period, but I think investors should still consider having an overweight exposure. Earnings could help keep those names pushing higher.” Once earnings season begins, Orton said it would be very constructive for market breadth if the larger banks and industrials complex reported strong results.
Revisiting “AI 2.0.” “The weakness we saw in semiconductor companies at the end of last week has not signaled the end of the artificial intelligence (AI) trade,” Orton said. “Rather, it’s a needed break from the torrid rally.” He believes that the turn in utilities, electric equipment, mining companies, and other ancillary trades on this theme offer an interesting entry point for investors who feel like they missed the rally earlier this year. “It has been encouraging to see software companies rally nearly 10% over the past few weeks following positive earnings results as they play catch-up with semiconductor companies,” Orton said. “The key to success remains leaning into quality and investing in the most durable growth. There are some clear winners in this space, and there are many posers that are rightfully being brought back to reality.”
What is happening to small caps? “It was nice to see small caps hold up last week, but it doesn’t change the concerning trend of small caps declining when interest rates are down,” Orton said. “This tends to be bearish because it signals increased recession risk, and I’ve been commenting for the past few weeks that the equity market is increasingly more focused on growth than on rates.” Orton thinks the market may be over-reacting to the slowing growth story and that the data is simply normalizing to trend levels.

“The Russell 2000^® Index is underperforming the S&P 500 Index by almost 9% this quarter and 15% year to date,” Orton said. “Underperformance since the start of 2023 is now almost 30%, and the three largest S&P 500 Index companies each have market capitalizations that are more than the entire Russell 2000^® Index.” Mid-cap companies are performing in line with the S&P 500® Equal Weight Index, and Orton said that sector performance at the lower end of the market capitalization scale does not suggest recessionary positioning. “I tend to think the risk–reward tradeoff still looks interesting for small-cap companies, especially if the narrative settles on a soft landing and some additional clarity is provided on the inflation front.” He suggests that investors consider building a small exposure that can be increased if clarity is provided.

What to watch

Inflation will be in focus this week: On Friday, the U.S. Department of Commerce Bureau of Economic Analysis will release personal income and outlays data for May. The report will include the Personal Consumption Expenditures (PCE) Price Index, excluding food and energy — core PCE, the U.S. Federal Reserve’s preferred gauge of inflation — and it is expected to show a deceleration from April. The second estimate of first-quarter U.S. gross domestic product (GDP) will be released on Thursday. And Conference Board consumer confidence data will provide an updated snapshot on perceptions around the labor market. Orton said that initial unemployment claims and continuing unemployment claims are always important to follow.

¹ Unless otherwise indicated, all data cited is sourced from Bloomberg as of June 21, 2024.

M-565150 Exp. 10/24/2024

June 18, 2024: Staying optimistic and vigilant

Key points

A small number of stocks have dominated the S&P 500 Index, but concentration tends to increase during bull markets.
Stocks that are working may be masked by elevated dispersion at the index level.
Investors should remain careful about putting new money to work in the very short term and may want to consider waiting for some consolidation — either through price or time — to increase their exposure to the market.

Many reasons have been put forth to dismiss the current bull market, including the U.S. Federal Reserve’s “higher for longer” policy, elevated index concentration, and expensive valuations. Despite the negativity, some investors are finding reasons to stay positive.

“All this pessimism has missed the positive fundamental underpinnings of this market and, frankly, the bearish thesis has simply been wrong,” said Matt Orton, CFA, Chief Market Strategist for Raymond James Investment Management. “I certainly appreciate the risks that are present, and perhaps the narrowness of what is working right now reflects those risks.”

The top 10 stocks in the S&P 500 make up over 34% of the index, the highest level on record (the previous highest level was 32.87% in 1963).¹ But Orton said that concentration tends to increase during bull markets, and the 1963 rally continued for years before a meaningful correction occurred.

“Despite the current set of risks, I remain optimistic while reiterating that investors should be careful about putting new money to work in the very short term,” Orton said. “Instead, consider waiting for some consolidation — either through price or time — to increase exposure to a market that I believe will broaden.”

Earnings growth has already broadened, and Orton said that it is accelerating higher across a wide range of sectors and industries; he sees some good values beneath the surface. “Yields are coming down and finally look to be breaking the upward trend that has persisted for most of this year,” Orton said. “Usually this is a prerequisite for increasing market breadth, and perhaps we’ll start to see a change beneath the surface once second-quarter earnings season kicks off next month.”

Orton said that for now, investors would do well to remain positive but vigilant and focused on capturing downside opportunities that might appear in the coming weeks.

“It’s interesting that we’ve seen yields break lower in the United States but breadth hasn’t followed,” Orton said. “The dollar has also remained firm, and credit spreads are widening a bit.” He said that last week was a perfect example of how the market of stocks, represented by the S&P 500^® Equal Weight Index, is disconnected from the stock market, reflected by the capitalization-weighted S&P 500 Index.

While the small number of market leaders is anomalous, Orton said that investors need to ask what is driving these gains. “Here the fundamentals come back into play. There’s reason to be optimistic around artificial intelligence (AI) integration following the long-anticipated unveiling of consumer-facing AI capabilities at a key consumer hardware company, and plenty for investors to look forward to following a key semiconductor company’s rosy forward guidance last week,” he said.

“Meanwhile, there are many stocks working beneath the surface, they’re just masked at the index level by incredibly elevated dispersion,” Orton said. “The elevated level of dispersion is actually a signal to me that investors are hyper-focused on fundamentals and key growth drivers. And it’s hard to ignore the high-quality growth at the top of the market.”

Orton believes that this market should not be mistaken for one that is flying too close to the sun and about to meet its impending doom.

Orton’s investment playbook

Orton said that it’s important to continue owning what’s working in the market. “The dominance of the mega-cap trade is perfect evidence of this: These are high-quality companies with strong, long-term secular growth tailwinds,” Orton said. However, he said it is important not to overlook the increase in earnings breadth that has been playing out across sectors. “Broadening earnings growth could ultimately help drive broader price performance,” he said, highlighting these larger themes:

Industrials oversold. Nearly every sector outside of technology and communication services has lagged over the past few weeks, but Orton was surprised to see the industrials sector continuing to struggle. “This sector has been a source of relative strength over the past year or so, generally outperforming the S&P 500^® Equal Weight Index,” Orton said. Sentiment has turned quickly, and he believes that industrials are exposed to many of the tailwinds coming from AI along with the geopolitical tensions affecting the aerospace and defense industry.
Waiting on Europe. Europe is still grappling with its European Union parliamentary elections and the call for snap elections from French President Emmanuel Macron. “The damage to French markets has been significant, and until we get through the French elections, this is a dip that I wouldn’t be chasing right now,” Orton said. In his view, adverse election outcomes could mean a higher cost of equity and downside risks for banking sector profitability, but he said that it depends on the exact policy agenda.
Crouching China, rising India. Asset allocation is critically important over the long term, but so is country allocation. “$1 million invested in the MSCI China Index on December 31, 2013, would be worth only $935,400 as of June 14, 2024. An identical investment in the MSCI India Index would be worth $2.59 million over the same period,” Orton said. “India has been the only major compounder outside of the U.S. over the longer term, and we’re at the precipice of another strong secular growth phase.”

Orton believes that the country has a long runway for an infrastructure build-up, seeing it in the early phase of a capital expenditure upcycle that could last for 9 to 10 years. “There is also government and geopolitical support for scaling manufacturing in select sectors like electronics, autos, pharmaceutical, and textiles over the next decade as companies look to shift capacity away from China,” he said. There could be some near-term consolidation as investors digest the election results and the government forms a budget, but Orton thinks investors should consider any downside as a good entry opportunity.

What to watch

The focus remains on monetary policy: Central bank decisions are due from the People’s Bank of China, Bank of England, Reserve Bank of Australia, and Swiss National Bank this week. The yen is near three-decade lows versus the dollar, which will be in focus when the Japan Consumer Price Index data is released on Friday. French politics will keep traders busy as they gauge risks to financial stability; last week was the worst for the nation’s bonds since the 2011 European debt crisis.

Retail sales data for the United States will be released this week along with industrial production figures for May. Earnings results from homebuilders will also be noteworthy because they could provide an additional view into the state of the consumer and persistently elevated mortgage rates.

¹ Unless otherwise indicated, all data cited is sourced from Bloomberg as of June 14, 2024.

M-561695 Exp. 10/17/2024

June 13, 2024: June Fed meeting: Something for everyone

Key points

Below the surface, the details of the Federal Open Market Committee’s projections for interest rates provide a slightly less hawkish message than the headlines might suggest.
Matt Orton, CFA, believes that the Fed continues to have an easing bias and still sees the first rate cut coming in December.
The Consumer Price Index likely didn’t play a key role in the Fed’s decision this week, but it aligns with other recently reported economic data that supports the Fed’s bias to ease rates.

There was something for everyone in the Federal Open Market Committee (FOMC) decision for June, though in total not much has changed. On the surface, the revised dot plot came in on the hawkish side of expectations, with a median projection of just one interest rate cut this year and a long-run dot that moved up to 2.75%, quite a jump from the previous 2.5625%.¹

“This is a meaningful shift given that there were 10 FOMC members in March projecting below 4.6% in 2024,” said Matt Orton, CFA, Chief Market Strategist at Raymond James Investment Management. “That shifted to zero members in June. Frankly, it seems like the Fed is a bit scarred from the disappointing inflation reports earlier this year and wants to build sufficient confidence that inflation is on track to converge to the 2% target before embarking on a rate-cutting cycle.”

But Orton said we knew this was the case based on the public comments from U.S. Federal Reserve officials heading into the June meeting. On the flip side, many of the details provide a slightly less hawkish message than the headlines might suggest. As the updated dot plot shows, most participants projected two interest rate cuts this year, seven penciled in one cut, and just four members expected no cuts (up from two). Critically, Orton believes that the Fed is likely either to hold interest rates where they are or cut them, but not raise them, and he noted that Fed Chair Jerome Powell said the committee really doesn’t see any meaningful chance of another hike. Further, Powell also noted that while the Fed now expects fewer cuts this year, more cuts are projected in 2025 (now four cuts versus three prior). Orton said this suggests the changes in the dots are more about delaying the first move to gain sufficient confidence than about rethinking the level of policy restriction.

Changes to the Federal Reserve’s dot plot

Source: Bloomberg; as of 6/12/24.

Fed holds policy rate steady for seventh consecutive meeting
U.S. Treasury 10-year yield since July 2023

Source: Bloomberg; as of 6/12/24.

The Consumer Price Index (CPI) for May was reported hours before the FOMC meeting, but Orton said he did not think it factored too much into the committee’s calculus. While Fed officials had the opportunity to incorporate the data into their economic and rate projections, Powell said “some people do” but “most people don’t” engage in that process. Even if more officials did make updates, the CPI data was a bit noisy with the biggest sources of downside surprise — airfares and vehicle insurance — not factoring directly into the Personal Consumption Expenditures (PCE) deflator. That said, Orton sees the fact that there was good progress on non-shelter services inflation as cause for celebration. The CPI report fits into a broader mosaic of economic data over the past 10 days or so that has been much more balanced with respect to the labor market, allowing the Fed to retain its bias to ease rates.

“My base case still remains for one cut in December,” Orton said, “though quicker progress over the next few months on PCE inflation could pull that forward.”

¹ Unless otherwise indicated, all data cited is sourced from Bloomberg as of June 12, 2024.

M-560394 Exp. 10/13/2024

June 10, 2024: Sifting through the noise

Key points

Markets have seen elevated volatility around every economic data release that might alter the inflationary picture.
Weaker Job Openings and Labor Turnover Survey (JOLTS) data spurred a rally in bonds before an unexpectedly strong payrolls report sent U.S. Treasury 10-year yields higher.
Matt Orton, CFA, recommends caution in putting money to work amid the macro cross-currents, suggesting that investors consider being patient and building a list of broadening plays.

It was a volatile week of elections abroad, and now investors need to prepare for a busy week of central bank activity. After a stronger than expected payroll report on Friday, the U.S. Treasury 10-year yield rocketed higher by nearly 15 basis points.¹

“The intense focus and elevated volatility around every single economic data release that might alter the inflationary picture is getting exhausting,” said Matt Orton, CFA, Chief Market Strategist for Raymond James Investment Management. “And it’s further compounded by increasing policy divergence.” The European Central Bank cut rates last week, the U.S. Federal Reserve (Fed) is likely to hold rates steady this week, and the Bank of Japan (BoJ) is on a slow hiking path.

“Add to this mix the incredibly elevated dispersion among stocks taking place beneath the surface, and it has created a noisy environment where it becomes increasingly important for investors to really focus on the fundamentals that matter,” Orton said. He sees no respite for investors this week: Consumer Price Index (CPI) data will be released on Wednesday morning, just hours before the release of the June Federal Open Market Committee (FOMC) statement and the press conference with U.S. Federal Reserve Chair Jerome Powell. A Bank of Japan (BoJ) policy board meeting also is scheduled for the end of the week.

“Interestingly, nothing is expected to change — it’s pretty much a given that the Fed will hold rates steady at 5.25% to 5.5% for a seventh meeting and the BoJ won’t take any tightening action,” Orton said. “But there is plenty of room for investors to experience extreme volatility, especially since we get an updated FOMC summary of economic projections.”

Orton said that given all of the noise and event risk on the horizon, the key is contextualizing how incoming data might change the benign underlying economic backdrop that has supported equities thus far. “To me, it was encouraging to see that the labor market still appears healthy despite some of the recent weakness in activity data,” he said. “On the flip side, I don’t like the weakness in commodities, which seems to be more based on growth concerns than supply and demand.” Orton believes that investors will see more balance in the market as yields eventually break down.

“There’s absolutely no reason to be throwing money at this market,” Orton said. “Stick with what’s working, but look for downside opportunities to think about selectively putting capital to work.” He recommends that investors consider leaning into a gradually broadening market in the second half of the year: “With some cyclical parts of the market rolling over recently for specious reasons, investors will have the chance to add to positioning in higher-quality names as they regain footing.” He also noted that in overseas markets, economic and earnings momentum are moving higher.

“While the payrolls report may have been a setback for declining yields, some nuance is required here,” Orton said. “I would actually argue that the strong headline number was really a mixed bag supporting the notion that the labor market is rebalancing, not deteriorating.” Headline payroll growth blew away expectations, posting a roughly 4-standard deviation surprise. Average earnings were also high, unexpectedly rising 0.4%.

“However, the unemployment rate jumped to 4%, which almost no one expected, and it looks to be a function of weak household employment,” Orton said. The labor force participation rate unexpectedly slumped to 62.5%, and he said that it should have put downward pressure on unemployment. “Overall, though, the evidence skews to a stronger labor market than thought, or at least feared,” Orton said. When taken in totality, he believes that these developments will not lead to a change in the Fed’s prediction for future rate cuts.

May’s nonfarm payroll employment came in above all estimates
Summary of 77 economists’ estimates

Source: Bloomberg; as of 6/7/24.

“This is also a Fed that we know has an easing bias and will cut once there is a hint of trouble,” Orton said. The recent jump in yields might look extreme, but a continuation in higher yields could destabilize equities in the short term and lead to better entry points for investors.

Orton said that amid this noise, investors are losing focus on the fact that global growth and earnings are moving in a direction that could support the market. “This doesn’t rule out some consolidation in the short term, which would be welcome given the incredible run that we’ve had since October,” he said.

“Based on some of the recent economic data in the United States, this weakness does not look like a meaningful slowdown,” Orton said. Critically, investors are seeing a broadening of earnings growth that could continue over the next year. “This is especially important since the gains across technology and the mega caps are naturally expected to normalize as year-over-year comparisons become more difficult, but an inflection higher across the rest of the market could continue to provide solid growth overall,” he said. Orton said he was optimistic on the markets over the longer term, but a few trends concern him in the near term:

Hawkish trends from higher rates and a higher dollar. Orton believes these must break down conclusively before investors can consider getting behind the broadening that keeps trying to take place beneath the surface.
Weakness in cyclicals. He said cyclicals need to regain strength and outperform after the Fed clarifies that rate cuts are its base case for monetary policy (Orton said he would be shocked if the U.S. Federal Reserve dot plot said differently).
Flagging commodities. These stocks likewise need to regain strength, Orton said. Breakdowns in oil and copper could indicate growth concerns (i.e., flagging demand), and Orton said that a reversal could help increase risk appetite.

“I think oil and many energy-related assets look abnormally cheap from a risk-reward perspective and offer a very good geopolitical hedge for portfolios,” Orton said.

Orton said that the Eurozone is seeing positive macroeconomic momentum that is helping to drive corporate earnings upgrades at the micro level. “Investors haven’t been paying enough attention to these changes, and I believe that building better balance in portfolios will be the key to success going forward,” he said. For Orton, building better balance means leaning into cyclicality and looking abroad for additional diversification.

Orton’s investment playbook

Orton is wary of putting money to work amid the macro cross-currents: “I’ve said for a while not to chase the market higher. Redeploy capital on weakness instead. Be patient here, and consider building a list of broadening plays. Many interesting idiosyncratic opportunities have opened based on the past few weeks’ price action.”

Accordingly, Orton’s investment playbook includes three areas to watch:

Follow the earnings. Equities around the world are finally seeing strength that is driven by earnings, moving away from the expansion of price to earnings multiples. The economic growth/inflation tradeoff is giving less of a boost to multiples because inflation is stickier in most developed economies than initially anticipated. “The good news is that global earnings per share upgrades are now at the highest rate in the past few years,” Orton said.

Notably, it’s coming from more than the mega-cap companies in the United States. Orton highlighted first-quarter earnings results that showed a broadening out not only of earnings growth, but also of earnings that beat forecasts. Outside of the Magnificent Seven, the other 493 S&P 500 Index constituents had positive year-over-year earnings growth in the first quarter, and Orton expects this to continue going forward. His optimism for selectivity in emerging markets also fits into the earnings growth story – the earnings growth rate for emerging markets (EM) countries is expected to be double that of the rest of the world. “It’s worth noting that across the EM complex, which has led the global tightening and easing cycle, value and distressed bonds have outperformed since the easing cycle began in earnest.” This may suggest that some of the more “distressed” long duration assets, like biotech and real estate investment trusts (REITs), may outperform in other regions as their central banks get ready to start easing policy, he said.
Small caps continue to diverge. Small caps had rallied for the past few weeks, with more than 60% of companies listed in the Russell 2000® Index moving higher, but the trend has sharply reversed. First, weaker Job Openings and Labor Turnover Survey (JOLTS) data fed into the narrative that growth was slowing, and small caps broke down on those fears despite a strong rally in bonds, Orton said. Small caps were dealt another blow on Friday as bond yields surged. “This whipsaw, and the inconsistent price action around macro forces, highlights just how fraught it has been investing in small cap companies,” he said. “But that’s also where there could be some of the best opportunities.”

Orton said that the Russell 2000 Index’s price relative to the S&P 500 Index has plunged to levels not seen since the aftermath of the 2001 dot-com bubble burst. It’s a similar picture on a price-to-sales measure, showing just how steep the discount on small caps has gotten. “I’ve noted before that some of this discount is deserved, given that the earnings gap between the two remains large,” he said. “It’s hard to make a case for small caps right now if you truly believe the economy is weakening more than the headline data suggest, but I think investors have overreacted to growth concerns.”
The growth story of India. Orton has been bullish on India for the past two years, but his trip to the country last week — speaking with senior policy makers and corporate management teams about the future of India’s growth and investment trajectory — left him even more optimistic on its growth prospects and potential for outperformance. “The infrastructure story is real and is unlikely to be derailed by the new coalition government,” Orton said.

India’s infrastructure build-up is still in the early phase of a capital expenditure upcycle, which tends to last for 9 to 10 years.Government and geopolitical support could scale manufacturing in select sectors like electronics, autos, pharmaceuticals, and textiles over the next decade as companies look to shift capacity away from China, according to Orton. “While there could be some near-term consolidation as investors digest the election results and a budget is formed, I think investors should consider any downside to be a good entry opportunity,” he said.

Rising India, Crouching China
Index returns since 2019

Source: Bloomberg; as of 6/7/24.

What to watch

Central banks and inflation data will take center stage with Wednesday’s FOMC meeting and the BoJ meeting at the end of the week. Core CPI data will be released on Wednesday, and U.S. Producer Price Index data will be released on Thursday. The University of Michigan Index of Consumer Sentiment data will be released on Friday.

While the economic calendar is quite busy, there will also be a focus on Apple’s Worldwide Developers Conference on Monday; the company’s weight in the S&P 500 Index means that any moves up or down can have an impact on the overall market.

¹ Unless otherwise indicated, all data cited is sourced from Bloomberg as of June 7, 2024.

Risk Information:
Investing involves risk, including risk of loss.

Diversification does not ensure a profit or guarantee against loss.

Disclosures:
Index or benchmark performance presented in this document does not reflect the deduction of advisory fees, transaction charges, or other expenses, which would reduce performance. Indexes are unmanaged. It is not possible to invest directly in an index. Any investor who attempts to mimic the performance of an index would incur fees and expenses that would reduce return.

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature, or other purpose in any jurisdiction, nor is it a commitment from Raymond James Investment Management or any of its affiliates to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical, and for illustration purposes only. This material does not contain sufficient information to support an investment decision, and you should not rely on it in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and make their own determinations together with their own professionals in those fields. Any forecasts, figures, opinions, or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions, and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements, and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.

The views and opinions expressed are not necessarily those of the broker/dealer or any affiliates. Nothing discussed or suggested should be construed as permission to supersede or circumvent any broker/dealer policies, procedures, rules, and guidelines.

Sector investments are companies engaged in business related to a specific sector. They are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification.

Investing in small cap stocks generally involves greater risks, and therefore, may not be appropriate for every investor. The prices of small company stocks may be subject to more volatility than those of large company stocks.

International investing presents specific risks, such as currency fluctuations, differences in financial accounting standards, and potential political and economic instability. These risks are further accentuated in emerging market countries where risks can also include possible economic dependency on revenues from particular commodities or on international aid or development assistance, currency transfer restrictions, and liquidity risks related to lower trading volumes.

Definitions
Basis points (bps) are measurements used in discussions of interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01%.

Breadth describes the relationship between the median and the mean of a market index. When a few data outliers result in a mean that is substantially larger (or smaller) than the median of the full data set, then the performance of the entire index is being driven by a “narrow” selection of companies. An index supported by “broad” market movements is one where the median is closer to the mean.

The U.S. Consumer Price Index (CPI) measures the change in prices paid by consumers for goods and services. The U.S. Bureau of Labor Statistics bases the index on prices of food, clothing, shelter, fuels, transportation, doctors’ and dentists’ services, drugs, and other goods and services that people buy for day-to-day living. Prices are collected each month in 75 urban areas across the country from about 6,000 households and 22,000 retailers.

The “Consumer Price Index for All Urban Consumers: All Items Less Food & Energy” is an aggregate of prices paid by urban consumers for a typical basket of goods, excluding food and energy. This measurement, known as “Core CPI,” is widely used by economists because food and energy have very volatile prices.

Cyclical stocks have prices influenced by macroeconomic changes in the economy and are known for following the economy as it cycles through expansion, peak, recession, and recovery.

The U.S. Federal Reserve dot plot is a chart summarizing the Federal Open Market Committee’s (FOMC) outlook for the federal funds rate. Each dot represents the interest rate forecasted by one of the 12 members of the committee.

Earnings per share (EPS) is calculated as a company’s profit divided by the outstanding shares of its common stock. The resulting number serves as an indicator of a company’s profitability.

The federal funds rate is the target interest rate set by the Federal Open Market Committee of the U.S. Federal Reserve. The target is the Fed’s suggested rate for commercial banks to borrow and lend their excess reserves to each other overnight.

The Federal Open Market Committee (FOMC) consists of 12 members: the seven members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and four of the remaining 11 Reserve Bank presidents, who serve one-year terms on a rotating basis. The FOMC holds eight regularly scheduled meetings per year at which it reviews economic and financial conditions, determines the appropriate stance of monetary policy, and assesses the risks to its long-run goals of price stability and sustainable economic growth. The FOMC observes a blackout period, which begins at midnight of the second Saturday before each meeting. During the blackout periods, committee members do not make public comments about macroeconomic developments or monetary policy issues.

Hawkish, dovish, and centrist are terms used to describe the monetary policy preferences of central bankers and others. Hawks prioritize controlling inflation and may favor raising interest rates to reduce it or keep it in check. Doves tend to support maintaining lower interest rates, often in support of stimulating job growth and the economy more generally. Centrists tend to occupy the middle of the continuum between tight (hawkish) and loose (dovish) monetary policy.

Nominal measures of economic activity such as price trends or gross domestic product include all economic activity and are often referred to as headline measures. Real measures of economic activity are adjusted for inflation, in some cases by excluding more volatile prices for things like food and fuel.

The Job Openings and Labor Turnover Survey (JOLTS) program produces monthly data on job openings, hires, and separations compiled by the U.S. Bureau of Labor Statistics.

The labor force participation rate is an estimate of an economy’s active workforce. It is calculated by taking the number of people ages 16 and older who are employed or actively seeking employment and dividing it by the total non-institutionalized, civilian working-age population.

The Magnificent 7 refers to the seven largest stocks by market capitalization in the S&P 500 Index, as of Dec. 29, 2023. Collectively they made up more than 25% of the market capitalization of the entire index. They are Alphabet, Amazon.com, Apple, Meta Platforms, Microsoft, NVIDIA and Tesla

Market capitalization, or market cap, refers to the total dollar market value of a company’s outstanding shares of stock.

Mega-cap stocks are the largest publicly traded companies as measured by market capitalization. Generally, this refers to companies with market capitalizations over $200 billion.

Momentum investing is a strategy that aims to capitalize on the continuance of an existing market trend. It is a trading strategy in which investors buy securities that are already rising and look to sell them when they look to have peaked. It entails taking long positions on financial instruments with prices trending up and short positions on instruments with prices trending down.

The payroll report, officially known as the Employment Situation Summary, is a monthly U.S. Bureau of Labor Statistics (BLS) report tracking nonfarm payroll employment and the national unemployment rate, with data on changes in average hourly earnings, and job trends in public and private sectors of employment. The report is based on surveys of households and employers.

Positioning refers to assessments of whether professional investors are, on the whole, bullish or bearish on a particular security, industry, sector, market capitalization or other area of the market, as reflected by the extent to which they are invested in the area of the market in question.

A non-negative price to earnings (P/E) ratio reflects that the current price of the stock is at least equal to its current earnings per share (zero), or that investors are willing to pay a certain amount above the earnings (a multiple) for each share of stock (a positive ratio). A negative P/E ratio would reflect that the stock’s price is less than its earnings per share over a specified period of time.

The price to sales ratio (P/S) is calculated by dividing a company’s market capitalization by the revenue in the most recent year.

The Producer Price Index (PPI), published monthly by the U.S. Bureau of Labor Statistics, measures the average change over time in the selling prices received by domestic producers for their output.

Standard Deviation is a measure of the dispersal or uncertainty in a random variable. For example, if a financial variable is highly volatile, it has a high Standard Deviation. Standard Deviation is frequently used as a measure of the volatility of a random financial variable.

Sticky is a term used to describe measured data that is slow to change, in contrast to faster-changing or more variable data.

The summary of economic projections is produced following meetings of the Federal Open Market Committee and includes meeting participants’ projections of the most likely outcomes for real gross domestic product growth, the unemployment rate, and inflation for a forward-looking three-year window and over the longer run.

The University of Michigan Index of Consumer Sentiment is based on monthly telephone surveys in which at least 500 consumers in the continental United States are asked 50 questions about what they think now and what their expectations are for their personal finances, business conditions, and buying conditions. Their responses are used to calculate monthly measures of consumer sentiment that can be compared to a base value of 100 set in 1966.

The Worldwide Developers Conference is an information technology conference, organized by Apple, for the benefit of third-party software and hardware developers.

Indices
The S&P 500 Index measures change in stock market conditions based on the average performance of 500 widely held common stocks. It is a market-weighted index calculated on a total return basis with dividend reinvested. The S&P 500 represents approximately 80% of the investable U.S. equity market.

The Russell 2000^® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents approximately 7% of the total market capitalization of the Russell 3000^® Index.

The MSCI India Index measures the performance of the large and mid-cap segments of India’s market by tracking approximately 85% of the Indian equity universe.

The MSCI China Index captures large and mid-cap representation across China A shares, H shares, B shares, Red chips, P chips and foreign listings.

London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). ©LSE Group 2024. FTSE Russell is a trading name of certain of the LSE Group companies. Russell^® is a trademark of the relevant LSE Group companies and is used by any other LSE Group company under license. All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote, sponsor, or endorse the content of this communication.

M-559098 Exp. 10/10/2024

June 3, 2024: Get comfortable being uncomfortable

Key points

Corporate earnings growth, margins, and other fundamentals remain supportive of the bull market in stocks.
Keep an eye on the U.S. payrolls report and European Central Bank (ECB) President Christine Lagarde’s comments following the ECB’s decision on interest rates.
Areas to consider include the broader economic growth driven by the rise of artificial intelligence, small caps, and developed international markets, plus India.

Many investors are wary as stocks fluctuate and uncertainty over interest rates persists, but Matt Orton, CFA, Chief Market Strategist at Raymond James Investment Management, says, “I believe it would be a mistake to turn pessimistic now.”

Heading into this year, Orton says we knew that macroeconomic uncertainty would remain elevated as investors focused on the evolution of economic growth and the path of U.S. Federal Reserve (Fed) interest rate cuts. The strong upward march in equities continued through the first quarter, but we’re being reminded now that markets can go both up and down.¹ Now that earnings season has essentially ended, the reality that the Fed is constrained with respect to easing monetary policy in coming months has started to sink in. Additionally, those who anticipated an aggressive path of easing from the European Central Bank (ECB) following its first expected interest rate cut are starting to ratchet back their expectations as the disinflationary path hits a few speed bumps. As a result, many investors have been taking profits and hesitate to put money to work in a market with stalling upward momentum. Overextended positioning adds to the level of caution and the reversal in market breadth over the last two weeks further has investors on edge.

Yet Orton notes that fundamentals remain supportive of the bull market: Corporate earnings growth within the S&P 500 Index was quite strong in the first quarter, and critically, margins have held up remarkably well despite a tight labor market. Financial conditions also remain quite loose (the loosest since 2021). Credit conditions also have been well-behaved, though we need to be mindful for the potential of some credit spread widening. Orton recently has cautioned against chasing the market higher, and instead he suggests investors consider using downside opportunistically.

“There have been plenty of outsized moves at the stock and sector level that are somewhat masked by relative strength at the top,” Orton says. “I believe this creates some attractive entry points for investors to consider in increasing exposure to sectors like industrials. Stay the course and embrace the uncertainty.”

Earnings growth has been strong across sectors
S&P 500 first-quarter earnings growth by sector

Source: Bloomberg; as of 5/31/24. The numbers in parentheses indicate the number of companies that have reported first-quarter earnings so far, followed by the total number of companies in each category.

“I keep hearing to expect a ‘June swoon,’ but I think that’s being overly dramatic,” Orton says. Historically, June tends to be a relatively weak month with S&P 500 Index performance averaging a gain of just 0.1% since 1950. That would make it the fourth-worst month, on average, from a historical perspective. However, June performance over the past decade has been pretty solid, with the S&P 500 Index posting losses for the month just twice over this period.

“Rather than worry about historical precedent, we should instead focus on the positive underlying fundamentals,” Orton says. Some of the recent weakness certainly makes sense: The S&P 500 peak-to-trough decline in April was only 5.5%; and the market is up 28% since the October lows last year and is up 11.3% year to date. It’s normal for there to be some churn as the market works out of overextended conditions, he said. As long as the fundamentals continue to hold up, Orton believes the underlying thesis behind this bull market remains intact. It’s also worth pointing out that amid all of the movement last week, small-cap stocks managed to hold up quite well, and the Russell 2000® Index actually outperformed the S&P 500 Index in May. International equities also held up well, which is a reminder of the benefits of balance and increasing diversification that Orton has discussed all year.

Orton’s investment playbook

Several catalysts this week may help the market regain its footing and help breadth to expand once again. Economic data points that could provide additional insight into the trajectory of inflation include the Institute for Supply Management’s manufacturing and services reports, the Job Openings and Labor Turnover Survey (JOLTS) report for April, the much-anticipated ECB rate decision, and the U.S. payroll report on Friday. Fed officials also have entered a blackout period in advance of the June meeting of the Federal Open Market Committee (FOMC), and Orton says he expects that to be a positive for the market. Policymakers have been actively debating just how much restraint a 23-year high federal funds rate is exerting on the economy, and the differences in their messaging has injected volatility into rates as well as into the broader equity market. A core of FOMC members have argued that policy is constraining the economy enough to bring inflation down to target, but a number are worried that monetary conditions might still be insufficiently restrictive. Orton continues to believe that rate hikes are off the table and that rate cuts are a “when” not “if” scenario.

The underperformance of enterprise software companies last week also led to a further softening of market sentiment. The negative reactions to tepid guidance were extreme, with the S&P 500 software sector down 4.6% and some of the largest players moving lower by more than 20%. This has led to increasing calls that the artificial intelligence (AI) theme is overplayed.

“I couldn’t disagree more,” Orton says. He notes that AI is still in the hardware phase: The large foundational models upon which the AI ecosystem is being built require a lot of hardware to process information. Eventually the software and application creators will start to monetize, but right now it’s very selective. The mega-trend of AI has certainly not played out for now, Orton says, and instead last week’s big moves should prompt investors to be more selective in choosing the winners and losers as well as to consider looking at other ways to play this dominant theme. Accordingly, Orton is focused on four areas right now:

Artificial intelligence 2.0. We’ve seen strength across the hardware names as the initial phase of the AI buildout continues. Orton contends that the underperformance of software lately doesn’t undermine the case for the multi-year growth cycle he expects to see related to AI, but it does send a reminder that there could be increasing separation between the winners and everyone else. This has played out in the semiconductor and hardware space, he says, and we’re also seeing this push into other parts of the market, especially in sectors and industries outside of technology. Investors who have looked at playing the “AI 2.0” phase have been rewarded over the past month or so.

The strength of utilities has been impressive as the need to invest in the grid is all too evident, Orton says. Electric utilities and independent power and renewable companies still have a runway for further growth, especially as they become momentum stocks. Uranium companies have even rocketed higher on speculation that we’ll see increased investment in nuclear power, though Orton says he’s skeptical on this, especially after recent meetings with U.S. policy makers. Electrical equipment companies have also remained the source of strength in industrials as better electric and thermal storage will be required to enable any sort of transition to cleaner power. And he says not to forget about mining companies, where better balance sheet prudence coupled with strong demand for base metals like copper should keep a floor on hard commodity prices. Recently, miners have sold off as base metals like copper have taken a breather. He says this provides another reminder not to chase the market higher, but instead to wait for good entry points.

“The bottom line is that trillions of dollars could be spent on the buildout of infrastructure to support the growth of artificial intelligence, and I think there is a long runway of opportunity to invest in the companies that are beneficiaries of the capital expenditure spending,” Orton says.
Increasing breadth within international markets. It’s widely expected that the ECB could cut interest rates this week, and while the pace of future cuts might be slower than investors initially envisioned, Orton says this divergence with the United States is creating opportunities. Better than feared earnings growth has helped international developed equities as represented by the MSCI EAFE^® (Net) Index to outperform the S&P 500 so far quarter to date. The sideways movement in Japanese equities also presents a good entry point and that Orton expects to provide additional support to the broader international developed markets. Corporate reforms in Japan and higher shareholder returns should provide support for stocks there while dividends are rising, and Japanese corporations recorded a record-high 6 trillion yen (or $42.4 billion) in buybacks last fiscal year. Investors are embracing the change. Orton says a rise in overseas cash stock purchases suggests that long-term foreign investors might be increasing exposure to Japanese equities.
A summer for small caps? Orton says the underperformance of small caps over the past few years makes sense when looking at earnings results. The S&P SmallCap 600^® Index’s annual profits are currently less than the first-quarter earnings of the largest single company in the S&P 500, and S&P 600 aggregate earnings before interest and taxes margins have almost halved from their peak of 9.0% in the third quarter of 2022 to 4.9% at the end of last quarter. The gap between the profitability of S&P 600 small caps and large and mid-caps is striking, Orton says. However, he says we’re starting to see a recovery in earnings for smaller companies with first-quarter results coming in ahead of expectations and mergers and acquisition activity accelerating. If earnings momentum can stay on track and finally show that it’s inflecting higher, Orton believes small caps could rally strongly off the base that has been formed, fueled by the valuation discount. He says he likes the current technical setup as well, and if the Russell 2000 Index can break its March high, he believes that also could help lead to inflows.
Rising India, crouching China. Building on the diversification theme, Orton says he would be remiss if he didn’t spend some time on India. “This has been my favorite emerging market for nearly the past two years, and I remain optimistic on the prospects going forward,” he says. Election results are announced Tuesday, and he says this should give the market a boost with more clarity that the current government’s pro-growth policies should remain in place. Infrastructure has been key to Orton’s bullish thesis on India. In the 10 years since Narendra Modi became prime minister, expenditures on road construction have increased by 12 times, budgets for urban metropolitan areas are up 8 times, and railroad spending is up 5 times. More than $800 billion has been spent, and Orton sees a huge opportunity and need for more private investments or public-private partnerships. He likes considering ways to implement this infrastructure theme via companies with exposure to roads and railroads, power, ports, cement, and similar projects.

On the flip side, Orton says it’s not surprising that Chinese equities have slid from their highs a few weeks ago as recent purchasing manager survey data highlights the growth challenges going forward.

What to watch

The main events this week will be the ECB’s interest rate decision and the U.S. jobs report.

The ECB is expected to cut interest rates by 25 basis points for the first time this cycle even as inflation in the region picks up. The focus will be on ECB President Christine Lagarde’s guidance on the bank’s approach to further cuts.

Friday’s update on nonfarm payrolls in the United States will be the last jobs report before the Federal Reserve meets on June 11-12 amid growing uncertainty around the path of interest rates.

¹ Unless otherwise indicated, all data cited is sourced from Bloomberg as of May 31, 2024.

Risk Information:
Investing involves risk, including risk of loss.

Diversification does not ensure a profit or guarantee against loss.

Disclosures:
Index or benchmark performance presented in this document does not reflect the deduction of advisory fees, transaction charges, or other expenses, which would reduce performance. Indexes are unmanaged. It is not possible to invest directly in an index. Any investor who attempts to mimic the performance of an index would incur fees and expenses that would reduce return.

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature, or other purpose in any jurisdiction, nor is it a commitment from Raymond James Investment Management or any of its affiliates to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical, and for illustration purposes only. This material does not contain sufficient information to support an investment decision, and you should not rely on it in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and make their own determinations together with their own professionals in those fields. Any forecasts, figures, opinions, or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions, and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements, and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.

The views and opinions expressed are not necessarily those of the broker/dealer or any affiliates. Nothing discussed or suggested should be construed as permission to supersede or circumvent any broker/dealer policies, procedures, rules, and guidelines.

Sector investments are companies engaged in business related to a specific sector. They are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification.

Investing in small cap stocks generally involves greater risks, and therefore, may not be appropriate for every investor. The prices of small company stocks may be subject to more volatility than those of large company stocks.

International investing presents specific risks, such as currency fluctuations, differences in financial accounting standards, and potential political and economic instability. These risks are further accentuated in emerging market countries where risks can also include possible economic dependency on revenues from particular commodities or on international aid or development assistance, currency transfer restrictions, and liquidity risks related to lower trading volumes.

Definitions
Basis points (bps) are measurements used in discussions of interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01%.

Breadth describes the relationship between the median and the mean of a market index. When a few data outliers result in a mean that is substantially larger (or smaller) than the median of the full data set, then the performance of the entire index is being driven by a “narrow” selection of companies. An index supported by “broad” market movements is one where the median is closer to the mean.

A credit spread is the difference in yield between a U.S. Treasury bond and another debt security with the same maturity but different credit quality. Also referred to as “bond spreads” or “default spreads,” credit spreads are measured in basis points, with a 1% difference in yield equaling a spread of 100 basis points. Credit spreads reflect the risk of the debt security being compared with the Treasury bond, which is considered to be risk-free. Higher quality securities have a lower chance of the issuer defaulting. Lower quality securities have a higher chance of the issuer defaulting.

Credit spread widening refers to the expansion of credit spreads in response to changes in economic conditions that cause an increase in credit risk

Earnings before interest and taxes (EBIT), also known as operating earnings, operating profit, or profit before interest and taxes, can be calculated as revenue minus expenses excluding taxes and interest.

The federal funds rate is the target interest rate set by the Federal Open Market Committee of the U.S. Federal Reserve. The target is the Fed’s suggested rate for commercial banks to borrow and lend their excess reserves to each other overnight.

The Federal Open Market Committee (FOMC) consists of 12 members: the seven members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and four of the remaining 11 Reserve Bank presidents, who serve one-year terms on a rotating basis. The FOMC holds eight regularly scheduled meetings per year at which it reviews economic and financial conditions, determines the appropriate stance of monetary policy, and assesses the risks to its long-run goals of price stability and sustainable economic growth. The FOMC observes a blackout period, which begins at midnight of the second Saturday before each meeting. During the blackout periods, committee members do not make public comments about macroeconomic developments or monetary policy issues.

Fund flow is the net of all cash inflows and outflows into and out of a particular financial asset, sector, or index. It typically is measured on a quarterly or monthly basis. Investors and others look at the direction of fund flows for indications about the health of specific securities and sectors or the overall market.

Guidance refers statements from the managers of publicly traded companies that indicate whether they expect to realize near-term profits or losses and why.

The Institute for Supply Management produces several surveys assessing business conditions and outlooks across a variety of industries. They include the ISM Purchasing Managers’ Index (PMI), which measures the prevailing direction of economic trends in the manufacturing sector, and the Services ISM® Report on Business®, which is based on data compiled from purchasing and supply executives and reflects the change, if any, in the current month compared to the previous month in supplier deliveries along with seasonally adjusted business activity, new orders, and employment.

The Job Openings and Labor Turnover Survey (JOLTS) program produces monthly data on job openings, hires, and separations compiled by the U.S. Bureau of Labor Statistics.

A margin, short for net profit margin, measures how much net income or profit a company generates as a percentage of revenue. It can be expressed as a percentage or a decimal.

Momentum investing is a strategy that aims to capitalize on the continuance of an existing market trend. It is a trading strategy in which investors buy securities that are already rising and look to sell them when they look to have peaked. It entails taking long positions on financial instruments with prices trending up and short positions on instruments with prices trending down.

Market capitalization, or market cap, refers to the total dollar market value of a company’s outstanding shares of stock. Overextended is a term used to describe an investment, industry or sector with performance that has substantially and potentially unsustainably moved away from a longer-term average in a short period of time. The payroll report, officially known as the Employment Situation Summary, is a monthly U.S. Bureau of Labor Statistics (BLS) report tracking nonfarm payroll employment and the national unemployment rate, with data on changes in average hourly earnings, and job trends in public and private sectors of employment. The report is based on surveys of households and employers. Positioning refers to assessments of whether professional investors are, on the whole, bullish or bearish on a particular security, industry, sector, market capitalization or other area of the market, as reflected by the extent to which they are invested in the area of the market in question. Technicals refers to technical indicators of historic market data, including price and volume statistics, to which analysts apply a wide variety of mathematical formulas in their study of larger market patterns.

Indices
The S&P 500 Index measures change in stock market conditions based on the average performance of 500 widely held common stocks. It is a market-weighted index calculated on a total return basis with dividend reinvested. The S&P 500 represents approximately 80% of the investable U.S. equity market.

The S&P SmallCap 600^® Index seeks to measure the small-cap segment of the U.S. equity market. The index is designed to track companies that meet specific inclusion criteria to ensure that they are liquid and financially viable.

The MSCI EAFE^® (Net) Index measures the performance of performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East, excluding the U.S. and Canada. The MSCI EAFE^® (Net) Index subtracts any foreign taxes applicable to US citizens but not applicable to citizens in the overseas country.
The Russell 2000^® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents approximately 7% of the total market capitalization of the Russell 3000^® Index.

London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). ©LSE Group 2024. FTSE Russell is a trading name of certain of the LSE Group companies. Russell^® is a trademark of the relevant LSE Group companies and is used by any other LSE Group company under license. All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote, sponsor, or endorse the content of this communication.

M-555184 Exp. 10/3/2024