Equity Rotation in the U.S.

August 14, 2023

Coco Fang

More than 50% of S&P500 companies have already reported in the U.S. Q2 earning season. 80% of the firms registered a positive EPS surprise. The question for most investors now, is whether the earnings growth results will keep driving positive global equity market dynamics for the 2nd half of the year.

In the last 2 months we’ve seen a rotation that continued with Q2 earnings. Energy, Financials, Materials and Industrials – all of which suffered in the first 5 months of the year – have outperformed the S&P 500 since June. Meanwhile, some of the stronger outperformers on the earnings front – technology and communications services stocks – have underperformed in recent months.

Broader positive returns are good for market breadth, as equity performance in the first half of this year has largely been driven by valuation multiple expansion.  Valuations are now higher than average and the market seemed close to overbought, explaining the small correction we’ve witnessed this week.  Quality exposures and sectors at reasonable valuations are now key in asset allocation.

As markets continue to search for pockets of fundamental value in global equity markets, we believe the laggards from earlier in the year will continue to catch up in the second half.  Financials, small caps and international stocks may well benefit from continued (albeit slower) growth and a bottoming of industrial activity.


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