Most of the commentary around US equity market performance over the last few months has been focused on the skewing of the contribution to aggregate returns from the 'Magnificent Seven' tech stocks. However, as we mentioned in our June Performance review blog last month, the undercurrents in the market were already pointing to a marked improvement in market breadth. This theme continued in July.
Market return drivers have broadened not narrowed since May.
Exhibit 1 plots the performance of the FT Wilshire 5000 index versus its Equal Weighted equivalent. The latter reduces the skewing of the tech sector impact and is therefore a useful gauge of the underlying health of the equity market. In the aftermath of the SVB collapse earlier this year, the Equal Weighted Index fell substantially while the headline FT Wilshire 5000 appreciated driven by the Magnificent Seven. However, from the start of May the Equal Weighted index has outperformed rising 15.5% v 12.6% for the FT Wilshire 5000.
Scope for catch up? At the end of July, the FT Wilshire 5000 had risen to within 3.1% of its record high while the Equal Weighted index is still 21.9% below its peak level.
Exhibit 1: The FT Wilshire Equal Weighted index has outperformed since May
Source: Wilshire Indexes. Data as of July 31, 2023.
In July the sector weighted contribution to returns also broadened out
Exhibit 2 shows sector weighted contribution to returns for the FT Wilshire 5000 in July. It shows that the Financials sector delivered the largest contribution of 0.9% towards the aggregate index return of 3.6% (a quarter of the return).More importantly other sectors such as Energy and Consumer Goods also posted strong contributions to add to the returns from the Digital information and Technology sectors.
Exhibit 2: A broadening out in sector weighted performance contributions.
Source: Wilshire Indexes. Data as of July 31, 2023.
Style rotation has also reflected the broadening theme
Exhibit 3 shows the performance of FT Wilshire Large Cap Growth Style relative to Value (Chart 1) and also Large cap versus Small Cap relative performance ( Chart 2). After inflecting sharply higher from the start of 2023 both Growth and Large Cap outperformance has lost momentum since early June. This again reflects the diminishing impact of the Magnificent Seven stocks on market behavior.
Exhibit 3: Style rotation also shows the diminished impact of the Magnificent Seven
Source: Wilshire Indexes. Data as of July 31, 2023.
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