Equity markets came under pressure in the second half of the month, particularly areas such as large-cap tech stocks that had been key drivers this year
Small caps and S&P 500 Equal Weight outperformed core Nasdaq and S&P 500 indices in July
S&P 500 ETFs continued to dominate flows, but July saw increased demand for Small Caps and S&P 500 Equal Weight ETFs
The month started out in familiar territory, with tech-driven momentum helping both the Nasdaq-100 and S&P 500 set new record highs after seven straight sessions of gains. However, the Nasdaq-100 gave back those early gains plus more, eventually ending July down 1.6%.
The S&P 500 fared better, having set another record of its own on 16 July, before it too succumbed to the rotation out of tech stocks. The broad equity bellwether managed a 1.2% gain for the month. A major beneficiary of the rotation was the S&P 500 Equal Weight index, which gained 4.5%.
Performances in 2024 have converged, with year-to-date returns 15.6% and 16.7% respectively for the Nasdaq-100 and S&P 500, while the S&P 500 Equal Weight index is now up 9.8% year-to-date.
The “Magnificent 7” were again in the spotlight but sometimes for the wrong reason. Investors are beginning to question how long it will take for the capital expenditures that some companies are making on AI-related plans to translate into meaningful earnings growth. Scepticism grew leading up to important Q2 earnings reports in the last week of the month, with share prices dragged lower in the process. Among those reporting before month-end was Microsoft, with sales and earnings beating forecasts, but investors focusing on lacklustre results from its AI business.
July’s macro data – including an easing in consumer prices and, perhaps more importantly, another tick up in the unemployment rate – continues to support a Fed interest rate cut, with the market now pricing in what’s practically a certainty in September. By the end of the month, the market was reflecting an expectation for three cuts by the end of 2024, up from two predicted at the start of the month. Lower borrowing costs would typically help smaller companies as well as certain industries such as housebuilders. As a result, those areas of the market were among the best performers in July. The Russell 2000 small cap index gained 10.2% in the month.
Source: Bloomberg and Invesco, net new assets to 31 July 2024.
Source: Bloomberg and Invesco, net new assets to 31 July 2024.
The lion’s share of the month’s ETF flows continued to be into core S&P 500 products ($4.0 billion of NNA), but there was a further $1 billion of assets that went into S&P 500 Equal Weight ETFs and almost the same amount into Small Cap ETFs. At the same time, Technology sector ETFs experienced small net outflows after having dominated sector flows in the year.
These patterns are reflective of the market conditions towards the end of the month, with a rotation out of the large tech names that had driven the market for the past year and, as a result, were looking susceptible to a correction, while some investors were perhaps seeing value in small caps especially in light of the prospects for rate cuts. And equal weight versions of the S&P 500 offer significantly reduced concentration risk for investors wanting to maintain broad exposure.
Sector composition was detrimental to the performance of the Nasdaq-100 compared to the S&P 500, particularly the Nasdaq-100’s greater exposure to the Information Technology and Communication Services sectors. That the Nasdaq excludes Financials also detracted from the index’s relative performance as this was one of the best performing sectors in the month.
GICS[1] sector |
Nasdaq-100 ending weight |
S&P 500 weight* |
Weight in Nasdaq-100 rel. to S&P 500 |
|---|---|---|---|
Information Technology |
49.8% |
32.4% |
17.3% |
Communication Services |
15.6% |
9.2% |
6.4% |
Consumer Discretionary |
12.5% |
9.9% |
2.6% |
Consumer Staples |
6.5% |
5.8% |
0.7% |
Utilities |
1.3% |
2.3% |
-1.0% |
Materials |
1.6% |
2.2% |
-0.6% |
Real Estate |
0.0% |
2.1% |
-2.1% |
Energy |
0.5% |
3.6% |
-3.1% |
Industrials |
5.3% |
8.4% |
-3.1% |
Health Care |
6.5% |
11.8% |
-5.2% |
Financials |
0.5% |
12.4% |
-11.9% |
Source: Bloomberg, Invesco, as at 31 July 2024. *S&P 500 weights as at 21 June 2024 (the latest available data) due to licensing restrictions applied by the index provider.
Source: Bloomberg, Invesco, to 31 July 2024
While most of the month’s headlines are around the Information Technology sector, its performance (-2.1%) paled in comparison to the 4.2% decline of Communication Services, dragged down by heavyweights Meta, Alphabet and Netflix. Somewhat surprisingly, those two were the only sectors finishing the month in negative territory. At the other end of the performance spectrum were Real Estate (+7.1%), Utilities (+6.7%), Financials (+6.3%), Industrials (+4.8%) and Materials (+4.3%).
With renewed questions being asked about the US economy and potentially rich valuations of large-cap tech stocks in particular, equity investors have more to consider now than probably at any time in the past year. And while some of these questions are not easily answered, one certainty (at least according to Fed Funds futures) is a Fed rate cut in September. By the end of July, the market had priced in three rate cuts by the end of 2024, up from the two predicted at the start of the month. The implications are only beginning to be reflected in equity markets, and in investor portfolios.
Politics could play a more pivotal role in equity markets this year than has been the case in previous election years. Although historically elections have had little impact on the general direction of equity markets, we could see certain sectors or segments favoured (or unfavoured) depending on who wins the White House, or sooner if there is greater certainty in the run-up to November. Given that the official candidates for each party have only just been confirmed, it may still be too early for most investors to start making portfolio adjustments. But as the campaign evolves over the coming months, we could start to see investors making tactical portfolio adjustments as their views on the election outcome become clearer.
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1Global Industry Classification Standard (GICS)
The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.
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Data source Invesco/ Bloomberg as at 31 July 2024 unless otherwise stated
Views and opinions are based on current market conditions and are subject to change.
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