Looking Back at Equity Factors in Q2 2024 With WisdomTree

Key Takeaways

The second quarter began with inflation concerns causing a negative return in April, but improved inflation led to a more hopeful market in May and June, with AI and semiconductor stocks leading.
During Q2, growth, momentum and quality factors performed well in developed markets, while small cap and value struggled in the U.S., and emerging markets saw strong momentum and a rebound in value stocks.
Looking ahead to Q3 2024, potential catalysts for market broadening include the Federal Reserve’s expected rate cut in September, narrowing earnings growth expectations between major tech stocks and the rest of the market and the resolution of uncertainty from the U.S. presidential election.

After a strong start to the year, markets entered the second quarter weighted by increasing inflation worries. With expectations of the number of Federal Reserve cuts melting in the sun, MSCI World posted a negative 3.7% return in April. However, inflation print improved over the rest of the quarter, leading to a more hopeful tone in May and June. While cuts remain elusive, the new expected date is now September; markets have restarted their march upward. Artificial intelligence and semiconductor-related stocks continued to lead, though, and a broadening of the market remains elusive.

This installment of the WisdomTree Quarterly Equity Factor Review aims to shed some light on how equity factors behaved during this second quarter and how this may have impacted investors’ portfolios.

Performance in Focus: More of the Same in May and June

In Q2, MSCI World (+2.6%) and MSCI USA (+3.9%) continued to perform quite well. After a slight inflation scare at the end of Q1 and the start of Q2, markets veered back to known territory, with large tech mega caps and semiconductors leading the way. The U.S. continues to lead despite the continuous postponement of rate cuts, thanks to a robust economy and inflation firmly on a downward path. Emerging markets ended up performing the strongest during the quarter, with MSCI EM gaining 5%.

Factor performance also highlights this form of consistency from the markets:

Overall growth, momentum and quality continued to do well in developed markets, with growth taking the lead.

In the U.S., small-cap and value suffered from the continuing postponement of rate cuts. They posted the deepest underperformance in Q2.

In Europe, growth stocks did not lead the way. Momentum and quality posted the strongest returns, followed by minimum volatility.

In emerging markets, momentum was the strongest, while growth faded away after a strong Q1. Value, however, rebounded strongly, followed by high-dividend stocks.

Figure 1: Equity Factor Outperformance in Q2 2024 across Regions

Sources: WisdomTree, Bloomberg, 3/31/24–6/30/24. Calculated in U.S. dollars for all regions except Europe, where calculations are in
EUR. Past performance is not indicative of future results.

YTD Factor Performance: More of the Same in May and June

Year to date, MSCI World is up 11.7%, and the leading factors are momentum, quality and growth. All other factors are underperforming. In the first six months of the year, it is clear that the success of a given factor is intimately linked to its investment in the Magnificent 7. All three factors that have outperformed are over-weighted in the Magnificent 7. Growth is the most over-weighted, but momentum also exhibited 5.7% more of the Mag 7 than the benchmark, and quality was over-weighted by 2.4%. The remaining factors that underperformed were all under-weighted, from high-dividend with an under-weight of -13% to value and small-cap, which do not invest at all in the Magnificent 7.

Figure 2: Equity Factor Outperformance in 2024

Sources: WisdomTree, Bloomberg, 12/31/23–6/30/24. Calculated in U.S. dollars for all regions except Europe, where calculations are
in EUR. Past performance is not indicative of future results.

This dominance of large caps and large-cap tech is particularly evident when comparing the relative performance of the S&P 500 and the S&P 500 Equal Weight Indexes. After a short period of dominance in 2022, the S&P 500 Equal Weight has been crushed by its market cap equivalent. In 2024, we observed a slight pause at the beginning of Q2, but in May and June, the S&P 500 accelerated even further, outperforming the S&P 500 Equal Weight by 2.1% over the two-month period.

Figure 3: Relative Performance of the S&P 500 Equal Weight vs. the S&P 500

Sources: WisdomTree, Bloomberg, 12/31/21–6/30/24. Calculated in U.S. dollars for all regions except Europe, where calculations are in
EUR. Past performance is not indicative of future results.

Valuations Decreased in the U.S. in Q2

In Q2 2024, developed markets became slightly more expensive. But again, the impact of large-cap tech was overwhelming. Those stocks became more expensive, leading factors like growth and quality to also become more expensive. On the contrary, the valuation of the rest of the market declined, leading to very attractive levels for a large portion of U.S. equities. Europe’s valuations moved down, on average.

Emerging markets, however, became more expensive across the board, with small caps and quality stocks leading the way.

Figure 4: Historical Evolution of Price-to-Earnings Ratios of Equity Factors

Sources: WisdomTree, Bloomberg, as of 6/30/24. Past performance is not indicative of future results. World is proxied by MSCI World
net TR Index. US is proxied byMSCI USA net TR Index. Europe is proxied by MSCI Europe net TR Index. Emerging Markets is proxied
by MSCI Emerging Markets net TR Index. Minimum Volatility is proxied by the relevant MSCI Min Volatility net total return index.
Quality is proxied by the relevant MSCI Quality net total return index. Momentum is proxied by the relevant MSCI Momentum
net total return index. High Dividend is proxied by the relevant MSCI High Dividend net total return index. Size is proxied by the
relevant MSCI Small Cap net total return index. Value is proxied by the relevant MSCI Enhanced Value net total return index.
WisdomTree Quality is proxied by the relevant WisdomTree Quality Dividend Growth Index.

Looking forward to Q3 2024

As we look forward to the second half of the year, we note three potential catalysts for the long-awaited broadening of the market and, with it, some form of small-cap and value revival. First, the Federal Reserve is finally moving toward its first cut, which is widely anticipated to happen in September. Such a cut would benefit less-profitable companies that form a large part of the small-cap universe and further boost this market segment. Second, the gap in earnings growth expectations between the Magnificent 7 and the rest of the market is closing toward the end of the year. This should create opportunities for stocks outside those seven mega caps to captivate investors’ attention. Finally, the U.S. presidential election creates significant uncertainty that weighs on the market. Historically, it shows that once the election’s results are known, whatever the results, uncertainty lifts, and this very often creates a late-year rally as well as a small-cap rally. A balanced approach allowing for investment outside of large-cap mega caps could allow investors to benefit from such a broadening.

Pierre Debru is an employee of WisdomTree UK Limited, a European subsidiary of WisdomTree Asset Management Inc.’s parent company, WisdomTree, Inc.

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