Research.LeutholdGroup

Despite outperformance of value and small-cap stocks, actively-managed value and small-cap portfolios both struggled. No style box managed a clear win in favor of active management, which is unusual for such leadership conditions. There are several explanations that can account for this behavior.

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Factor returns flipped dramatically in the third quarter after posting widely divergent results in the first half of 2024. The opening six months of the year saw Momentum and Growth each gain more than 20%, while the combined factors’ overall median return was a measly +5%.

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Continuing strong GDP growth enabled S&P 500 member companies to post solid year-over-year results in the second quarter of 2024.

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Domestic equities lost a little over 3% in the second quarter. Seven styles posted declines in that range, only to be countered by the continued outperformance of mega-cap growth stocks, which gained almost 10% for the quarter. This odd mix of returns left the S&P 500 up 4.3%, although that was clearly not the central tendency of equities in 2Q24

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This month’s “Refresh” is the quarterly update on our factor regime analysis. Factors, or investment styles, have historically performed quite differently under various economic and market conditions, and we have mapped these relationships to identify which factors are best positioned for today’s environment. Second quarter factor returns continued the hot-and-cold pattern that has defined equity markets for some time now.

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Today’s eight largest firms produced an average gross margin of 65% over the last fiscal year, a 15-point gain since 1999—and pretax margins are truly amazing. The striking level of profitability at the top of the S&P 500 explains the top-heavy nature of the bull market, and at least partially justifies valuations. 

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Despite a hostile setting for active management in Q1, six of nine style boxes in our ongoing analysis achieved active-fund win rates above 50% (60% on average bested their passive benchmark). The other three each scored just below 50% of active strategies beating passive. This is remarkable given the proven importance of market conditions in the active/passive performance derby.

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This month’s Leuthold Refresh is a quarterly update on our factor regime analysis. Factors, or investment styles, have historically performed quite differently under various economic and market conditions, and we’ve mapped these relationships to identify the factors best positioned for the environment at this time.

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Analysts often address sales and net income but rarely speak to the middle lines of the income statement. Our methodology works through each major line item—from sales to net profit—comparing the most recent quarter to the same quarter of a year earlier.

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While mid- and small caps notably underperformed, large growth results were freakish. Measured against the S&P 500 Growth index, an implausible 96% of active large growth funds beat that benchmark—a result that stands as one of the most extreme win rates ever seen for a style box.

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Speculating on the link between style performance and interest rates is a favorite pastime of factor aficionados, but 2023 provided a real-time laboratory to evaluate those ideas. We examined factor returns during the interest rate swings to uncover some empirical insights into this important relationship.

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This month’s Refresh continues our practice of summarizing the latest earnings season by evaluating the composite results of the S&P 500 member companies.

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Our analysis has consistently affirmed that actively managed portfolios do relatively better against their benchmarks during weaker market settings. In terms of active vs. passive, portfolio managers should love bearish environments, and third-quarter returns held true to that notion.

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The dominating and overwhelming gains by the Magnificent Seven have made it nearly impossible for most traditional equity factors to excel. Only two styles have managed to surpass the S&P 500’s YTD return: Growth and Quality—and both have healthy exposures to the Magnificent Seven.

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This month’s Refresh continues our practice of summarizing the latest earnings season by evaluating the composite results of the S&P 500 member companies. Many analysts address sales and net income, but rarely speak to the middle lines of the income statement.

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The active/passive performance derby experienced a severe case of whiplash the last three months. Through the end of the first quarter, market conditions were advantageous for active managers, now the second quarter has revealed a massive shift in favor of passive styles.

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This Leuthold Refresh updates our Factor Tilt analysis, an ongoing process to evaluate the attractiveness of commonly accepted investment styles. Factors are investment characteristics that have historically produced excess risk-adjusted returns, but relative results fluctuate over time.

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This note continues our practice of summarizing the latest earnings season by analyzing the composite results of the S&P 500 member companies, as if the SPY ETF represented a share in a single company with 500 subsidiaries.

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The performance derby between actively managed portfolios and passively managed index funds is a fascinating and important topic in the investment community at large. This note provides a brief update our previous studies through the first quarter of 2023.

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