- Most of the past month was characterized by a steady stream of economic data illustrating the challenges faced by the Fed in its efforts to pull off an economic soft landing. Inflation’s downward trajectory continues to flatten out at a higher rate than targeted and consumer spending remains elevated. Coming into the year markets expected the Fed to make approximately 6 rate cuts for the year. By the end of April, the expected range was 1 or 2. The exception to the bad news was the April jobs report which showed weaker-than-expected job creation, softer wages, and hours worked.
- The S&P 500 Index dropped about 4% in April as economic data releases took investor attention away from what has been another strong earnings season. While most stocks fell in April, the bias toward the largest stocks in the index remained. The top 10 stocks in the index outperformed the S&P 500, while the equal weighted S&P 500 index underperformed.
- Market sentiment fell with the market. However, market breadth remained high with all 10 sectors trading above their 200-day moving average and 6 sectors above their 50-day average. Individually, 72% of stocks in the S&P 500 were trading above their 200-day moving average at the end of April.
- We tactically added to large caps during the month. While historically high valuations remain a potential headwind, other factors such as better-than-expected earnings, lower odds of a recession, and the Fed biased towards easing all help to alleviate valuation concerns.
- As of May 3, 80% of the companies in the S&P 500 had reported 1Q EPS. 77% of those companies posted EPS that were better than expected, which was above the 10-year average, and in line with the 5-year average. 61% of the companies reported revenues that were above expectations, which was below the historical averages indicating that margin expansion drove the majority of EPS surprises. So far net EPS surprises were 61%, putting this quarter ahead of the last.
- While it is difficult to assign EPS surprises by style as a portion of many companies are represented in both indexes, our analysis suggests that Growth companies performed modestly better as evidenced by increased 2024 EPS estimates for the Growth indexes. That said EPS surprises were more balanced across styles than seen in past quarters.
- Sectors with large Value index weights (Financials, Industrials, and Heath Care) saw better than expected EPS growth. On the Growth side, Technology, Communications, and Consumer Discretionary all saw better than expected EPS growth.
- Over the course of earnings season the Value and Growth indexes have produced similar returns.
- We recognize our slight overweight to Value is akin to walking on a tightrope given current market conditions. Nothing has changed the fact that the S&P 500 is top-heavy with mega-cap growth. A soft landing implies no recession, and thus little cyclical rebound. Higher for longer interest rates put more pressure on asset-intensive businesses, which are much more likely to be Value companies. Still, forward EPS comparisons are much easier for Value stocks than Growth stocks.
- We eliminated our overweight to small-cap stocks in April on concerns that interest rates will stay elevated for longer than previously expected. Higher interest rates historically undercut earnings growth for small-cap stocks more than large- and mid-caps because of a greater reliance on floating rate financing structures relative to their larger peers.
- Over the past decade both small- and mid-cap stocks have underperformed large-caps despite delivering much stronger earnings growth than large-caps. The performance difference comes down to the change in P/E multiples. Large-caps have seen significant multiple expansion while small- and mid-caps have experienced multiple contraction.
- The rational argument for this divergence in multiples would be that the future EPS growth potential for large-caps has increased measurably over small- and mid-cap companies. While this appears true in the short-term, we have not found evidence to support this over the longer term. Valuation differentials are at extremes, which would suggest more than just a cyclical adjustment.
- We believe that sentiment has played a larger role with investors chasing performance instead of fundamentals. Over time we believe investors will return to fundamentals and multiples will readjust.
- We had expected that a pivot in Fed policy would act as a catalyst for that readjustment. An expected delay in that pivot may have pushed out the timing for small- and mid-cap outperformance.
Equity Indexes Characteristics
The Indexes mentioned are unmanaged statistical composites of stock market or bond market performance. Investing in an index is not possible.
The Touchstone Asset Allocation Committee
The Touchstone Asset Allocation Committee (TAAC) consisting of Crit Thomas, CFA, CAIA – Global Market Strategist, Erik M. Aarts, CIMA - Vice President and Senior Fixed Income Strategist, and Brian Cheyne, CFA, CIMA - Senior Investment Strategy Specialist, develops in-depth asset allocation guidance using established and evolving methodologies, inputs and analysis and communicates its methods, findings and guidance to stakeholders. TAAC uses different approaches in its development of Strategic Allocation and Tactical Allocation that are designed to add value for financial professionals and their clients. TAAC meets regularly to assess market conditions and conducts deep dive analyses on specific asset classes which are delivered via the Asset Allocation Summary document. Please contact your Touchstone representative or call 800-638-8194 for more information.
A Word About Risk
Investing in fixed-income securities which can experience reduced liquidity during certain market events, lose their value as interest rates rise and are subject to credit risk which is the risk of deterioration in the financial condition of an issuer and/or general economic conditions that can cause the issuer to not make timely payments of principal and interest also causing the securities to decline in value and an investor can lose principal. When interest rates rise, the price of debt securities generally falls. Longer term securities are generally more volatile. Investment grade debt securities which may be downgraded by a Nationally Recognized Statistical Rating Organization (NRSRO) to below investment grade status. U.S. government agency securities which are neither issued nor guaranteed by the U.S. Treasury and are not guaranteed against price movements due to changing interest rates. Mortgage-backed securities and asset-backed securities are subject to the risks of prepayment, defaults, changing interest rates and at times, the financial condition of the issuer. Foreign securities carry the associated risks of economic and political instability, market liquidity, currency volatility and accounting standards that differ from those of U.S. markets and may offer less protection to investors. Emerging markets securities which are more likely to experience turmoil or rapid changes in market or economic conditions than developed countries.
Performance data quoted represents past performance, which is no guarantee of future results. The investment return and principal value of an investment in the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be higher or lower than performance data given. For performance information current to the most recent month-end, visit TouchstoneInvestments.com/mutual-funds.
Please consider the investment objectives, risks, charges and expenses of the fund carefully before investing. The prospectus and the summary prospectus contain this and other information about the Fund. To obtain a prospectus or a summary prospectus, contact your financial professional or download and/or request one on the resources section or call Touchstone at 800-638-8194. Please read the prospectus and/or summary prospectus carefully before investing.
Touchstone Funds are distributed by Touchstone Securities, Inc.*
*A registered broker-dealer and member FINRA/SIPC.
Touchstone is a member of Western & Southern Financial Group
Not FDIC Insured | No Bank Guarantee | May Lose Value
