Research.LeutholdGroup

S&P 500 performance turned negative in the first quarter of 2025 and factor returns responded as expected. Defensive factors including Low Volatility and dividend-focused styles produced positive returns, and Value managed to eke out a tiny gain.

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The index’s income statement turned in one of its best showings of recent years. Year-over-year sales growth for S&P 500 companies landed at 5.6%, exceeding the 5.0% rate in nominal GDP and mimicking the sales growth posted earlier in the year. 

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The year 2024 will go down as one of the most hostile environments for active investors in the last 30 years. Style, size, and absolute market returns all have an impact on the relative performance of active versus passive portfolios; the fourth quarter continued a trend that has been in place for over two years.

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Our previous update reported that eight of ten factors outperformed the S&P 500, leading us to hope that maybe, just maybe, the market was broadening out from its narrow focus on mega-cap growth. Those hopes were dashed in the fourth quarter, as only two of ten factors managed to outperform the index.

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Revenues progressed for 75% of S&P 500 companies reporting, but only 60% of those realized gains in operating income. Pretax and net income continued to drop, such that headway in the bottom-line was positive for barely more than half of the firms.

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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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