US dominance and global market trends: A 2024 mid-year analysis

1H 2024 saw a significant performance disparity in the global stock market, driven by US trends and characterised by several key factors:
John Goetz

Pzena Investment Management

•  A small number of expensive mega-cap US stocks continued to drive US and global market performance, with the 10 largest ACWI stocks averaging a 47% year-to-date increase.
•  Globally, value stocks underperformed growth stocks by over 1,000 basis points, a rare occurrence seen in less than 5% of rolling six-month periods.
•  Equal-weighted (EW) US indices, which have historically outperformed cap-weighted (CW) indices, experienced a significant reversal, underperforming by 11.3% in the first half of the year.
•  US market performance has been driven by near-term earnings reports to an unusually high degree.

Concentrated performance

Relatively few mega-cap US stocks have driven US and global market performance year to date, continuing the trend of the past few years. The 10 largest ACWI stocks are up an average of 47% year to date, representing 61% of the total return of the MSCI ACWI Index. Eight of those stocks are US-based companies.

This greatly impacted value stocks globally, which trailed growth stocks by more than 1,000 basis points in the year's first half. This fairly rare occurrence happens in less than 5% of rolling six-month periods. The disparity between growth and value was largely a US phenomenon, as EAFE and emerging markets value indices trailed growth by a more modest amount (Exhibit 1).

This has led to a decade in which the US value universe has performed roughly in line with its history, generating an 11.1% annual return versus the 11.3% it returned for nearly a century. Meanwhile, over the same period, expensive stocks returned 14.4% versus their 9.2% historical return.

Disparity between equal-weight and cap-weight indices

Equal-weighted (EW) indices in the US have outperformed cap-weighted (CW) indices by 150 basis points per year over the past 65 years. This occurs because EW indices benefit from exposure to two key investing approaches, each with a superior long-term track record. First, EW indices systematically sell positions, as they get bigger and often overvalued, rebalancing into cheaper stocks. Second, EW indices invest more in stocks with smaller market capitalizations, benefitting from the small-cap effect.

However, that has reversed in the past couple of years, as mega-cap stocks have had an outsized impact on highly concentrated indices. That reached a crescendo in the first half of the year, as the CW index beat the EW index by 11.3% (Exhibit 2).

Over the past 65 years, CW beat the EW index by more than 10% in just 15 six-month periods out of more than 750 rolling six-month periods. Highlighting the concentration of performance of the past few years, four of those occurrences have happened since March 2020. In the past, the bounce back for EW following these 12 extreme periods has tended to be dramatic and happens fairly quickly, as EW has, on average, significantly outperformed CW in one- and five-year time frames, and value outperformed both by a wide margin (Exhibit 3).

Heightened market sensitivity to earnings favouring growth stocks

The US market has been highly sensitive to earnings beats and misses over the past several quarters, with the stocks that beat earnings richly rewarded, and the stocks that missed earnings severely punished. The stock price impact of these beats and misses is at a 30-year high (Exhibit 4). While we believe long-term normalized earnings are the ultimate driver of valuation, a market that is so sensitive to a single quarter’s earnings results seems unusually short-term focused.

True value stocks have not participated in this EPS-driven performance in quite the same way as the broader value index. While cheap stocks have beaten earnings by almost the same rate as the broader value index, their stock performance has trailed by 1,000 basis points (Exhibit 5).

Index confusion

We believe the performance disparity between a true value portfolio and value indices is at least partially driven by the vagaries of index formation, which we have previously written about. Value indices are currently filled with stocks that we would not consider value names. Since value and growth indices match cumulative market caps, expensive mega-caps have caused many growth names to fall into the value index. For example, the Russell 1000 Value Index currently has nearly twice as many stocks in it as the Russell 1000 Growth. Bizarrely, some stocks wind up with a portion of their weighting in both the value and the growth series. We are firm believers that a stock is either cheap or not, and the value indices are currently poor proxies for value.

No significant earnings impairment in our portfolios

Importantly, we have not seen any significant impairment of earnings in the companies we own across our portfolios. Consensus estimates for our Global Focused Value portfolio remain extremely attractive at less than 9x next year’s earnings, with consensus estimating a healthy 11% EPS growth.

Conclusion

The first half of 2024 has witnessed significant performance disparities in the global stock market, primarily driven by the success of US mega-cap growth stocks. There has been an unusual performance gap between growth and value indices, a stark difference between CW and EW indices, and a heightened market sensitivity to earnings reports. 

While true value stocks have underperformed value indices despite comparable earnings beats, this discrepancy may be influenced by index construction rather than fundamental weaknesses. We believe the underlying business fundamentals and earnings power of the companies we own is not reflected in the valuations seen in the market today. On the other hand, historically elevated valuations in other parts of the market have distorted near term returns. Extrapolating the continuation of these elevated returns for highfliers runs in the face of history.


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This document is intended solely for informational purposes. The views expressed reflect the current views of Pzena Investment Management (“PIM”) as of the date hereof and are subject to change. PIM does not undertake to advise you of any changes in the views expressed herein. There is no guarantee that any projection, forecast, or opinion in this material will be realized. Past performance is not indicative of future results. All investments involve risk, including risk of total loss. This document does not constitute a current or past recommendation, an offer, or solicitation of an offer to purchase any securities or provide investment advisory services and should not be construed as such. The information contained herein is general in nature and does not constitute legal, tax, or investment advice. PIM does not make any warranty, express or implied, as to the information’s accuracy or completeness. Prospective investors are encouraged to consult their own professional advisers as to the implications of making an investment in any securities or investment advisory services. For European Investors Only: This financial promotion is issued by Pzena Investment Management, Ltd. Pzena Investment Management, Ltd. is a limited company registered in England and Wales with registered number 09380422, and its registered office is at 34-37 Liverpool Street, London EC2M 7PP, United Kingdom. Pzena Investment Management, Ltd is an appointed representative of DMS Capital Solutions (UK) Limited and Mirabella Advisers LLP, which are authorised and regulated by the Financial Conduct Authority. The Pzena documents are only made available to professional clients and eligible counterparties as defined by the FCA. The value of your investment may go down as well as up, and you may not receive upon redemption the full amount of your original investment. The views and statements contained herein are those of Pzena Investment Management, LLC and are based on internal research. For Australia and New Zealand Investors Only: This document has been prepared and issued by Pzena Investment Management, LLC (ARBN 108 743 415), a limited liability company (“PIM”). PIM is regulated by the Securities and Exchange Commission (SEC) under U.S. laws, which differ from Australian laws. PIM is exempt from the requirement to hold an Australian financial services license in Australia in accordance with ASIC Corporations (Repeal and Transitional) Instrument 2016/396. PIM offers financial services in Australia to ‘wholesale clients’ only pursuant to that exemption. This document is not intended to be distributed or passed on, directly or indirectly, to any other class of persons in Australia. In New Zealand, any offer is limited to ‘wholesale investors’ within the meaning of clause 3(2) of Schedule 1 of the Financial Markets Conduct Act 2013 (‘FMCA’). This document is not to be treated as an offer, and is not capable of acceptance by, any person in New Zealand who is not a Wholesale Investor. For Jersey Investors Only: Consent under the Control of Borrowing (Jersey) Order 1958 (the “COBO” Order) has not been obtained for the circulation of this document. Accordingly, the offer that is the subject of this document may only be made in Jersey where the offer is valid in the United Kingdom or Guernsey and is circulated in Jersey only to persons similar to those to whom, and in a manner similar to that in which, it is for the time being circulated in the United Kingdom, or Guernsey, as the case may be. The directors may, but are not obliged to, apply for such consent in the future. The services and/or products discussed herein are only suitable for sophisticated investors who understand the risks involved. Neither Pzena Investment Management, Ltd. nor Pzena Investment Management, LLC nor the activities of any functionary with regard to either Pzena Investment Management, Ltd. or Pzena Investment Management, LLC are subject to the provisions of the Financial Services (Jersey) Law 1998. For South Africa Investors Only: Pzena Investment Management LLC is an authorised financial services provider licensed by the South African Financial Sector Conduct Authority (licence nr: 49029).

John Goetz
Managing Principal, Co-Chief Investment Officer
Pzena Investment Management

John is a co-portfolio manager for the Global, International, European, and Japan Focused Value strategies.

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