Equity Market Commentary Q2
Dispersion emerges as global equities advance
David Polak
Equity investment director
Mike Pollgreen
Investment product manager
Key takeaways for the quarter ended June 30, 2024
- Investors should consider remaining balanced with geographic diversity, exposure to dividend payers and growth that isn’t too concentrated.
- Global equity markets added to YTD gains in the second quarter, with 74% of our equity, equity income and balanced funds delivering positive returns on the quarter. (Includes 27 total vehicles based on F-2 share class for American Funds and returns based on market price for Capital Group ETFs.)
- With our bottom-up lens, differences in returns across companies and regions imply a broadening of investors’ opportunity set, which we view as a positive setup for long-term equity investors.
Equities continued their advance in the second quarter of 2024, the third straight quarter of positive results in the U.S. and globally.
The MSCI All Country World Index (ACWI) was up 2.9% on the quarter, setting an all-time high and sitting up 11.3% year-to-date. The U.S. market once again bested international markets with the S&P 500 Index up 4.3% on the quarter and 15.3% on the year and the MSCI ACWI ex USA up 1% on the quarter and 5.7% on the year.
U.S. index returns continue to be dependent on the largest constituents as evidenced with the equal-weighted S&P 500 Index advancing just 5.1% on the quarter, 10.2% less than the more commonly cited market cap-weighted version at 15.3%. That outsize concentration is not nearly as prevalent outside the U.S., with the difference between the index return and the equal-weighted index return far less in the MSCI ACWI, MSCI ACWI ex USA and MSCI EAFE (Europe, Australasia, Far East) Index.
The information technology and communications sectors — where stocks such as Alphabet, Amazon, Apple, Meta, Microsoft and NVIDIA reside — have fueled the market’s rally. However, we’re witnessing a hefty contrast between returns of the largest and the average companies in these sectors, as shown below.
Source: Capital Group. As of 6/30/24. Past results are not predictive of results in future periods.
Source: Capital Group. As of 6/30/24. Total return is a performance measure that reflects the actual rate of return of an investment or a pool of investments over a given evaluation period. Past results are not predictive of results in future periods.
That market concentration is not nearly as pronounced outside the U.S. Europe’s less concentrated equity market offers a wider breadth of companies that are top contributors in the MSCI EAFE Index. They include health care company Novo Nordisk, computer chip equipment maker ASML, software titan SAP and banking giant HSBC, among others.
That divergence of domestic versus abroad extends beyond concentration and into investment styles. Growth stocks continue to outpace value in the U.S., with the Russell 1000 Growth Index up 20.7% year-to-date, as compared to 6.6% for the Russell 1000 Value Index.
Outside the U.S., however, growth stocks are not seeing those same eye-popping outsized gains. The MSCI ACWI ex USA Growth Index has returned 6.7% year-to-date, just slightly ahead of its MSCI ACWI ex USA Value Index counterpart at 4.7%.
The recent equity win streak is partially supported by strong earnings growth widely projected to continue through next year across the globe.
The U.S. Federal Reserve, along with central bank counterparts globally, has remained steadfast in its policy while watching the economy power through tight spreads. The European Central Bank has already made its first rate cut, a sign that we are likely in a post hyperinflation world while the Fed has yet to make its move. A single rate cut in 2024 is now the base case of many economists. Recent inflation readings have indicated some deceleration, a possible harbinger of impending interest rate cuts as the Fed continues its push to 2%.
Inflation has begun to recede from the headlines just in time for elections to take its place in a year where a large percentage of citizens globally will go to the polls. Already, this year has been marked by election intrigue with the surprise rebuke of Indian Prime Minister Narendra Modi, who won his election by smaller margins than anticipated, along with the liberal Labour Party unseating the Conservative Party for the first time in 19 years in the United Kingdom. French elections yielded no clear winner, albeit a disappointment for the far right (in comparison to polls), which is attempting to form a new government as this is being written; and the contentious U.S. election set to cap things off in November. Regardless of the outcome of the 2020 rematch in the U.S., markets will likely see some volatility from the uncertainty that will come with what is slated to be a tight race.
American Funds and Capital Group ETFs update
American Funds mutual funds results based on F-2 share class, Capital Group ETFs based on market price
During the second quarter, 74% of our equity, equity income and balanced American Funds and ETFs1 (20 of 27) produced positive returns for shareholders. The range spanned from +3.9% for The Growth Fund of America® (GFA) on the high end to SMALLCAP World Fund® (SCWF)’s decline of 2.8% on the low end.
Though U.S. market returns were “positive but narrow,” our U.S.-oriented equity strategies offered the most consistently positive outcomes — all nine equity funds, all three equity income funds and one of two balanced funds produced gains.
However, while most mutual funds did well in the absolute, we faced challenges against our benchmarks as well as peer groups during the quarter.
Focusing first on our U.S.-focused mutual funds that pursue capital appreciation — our “growth” funds — it’s abundantly clear that AI-centered market narrowness has impacted our Q2 and year-to-date relative results. More specifically as noted above, a single company, NVIDIA, has determined much of this outcome.
NVIDIA ended the quarter representing 6.6% of the S&P 500 Index and 10.3% of the Russell 1000 Growth Index. It finished the quarter as the single largest company in the U.S., with the market ascribing it $3 trillion of market capitalization. The company’s stock was up 36.7% during the second quarter and 149.5% year-to-date.
Our investors approach portfolio construction using a bottom-up lens, so achieving holdings weights close to index levels is always an output of our process, not an input. When thinking about the company’s prospects for future success, we do count NVIDIA among our top holdings2 in GFA, CGGR Capital Group Growth ETFSM and AMCAP®. However, in all those funds, our weighting was far less than their respective benchmarks, resulting in it being the single largest relative detractor for the quarter for all three funds.
Staying with U.S.-focused funds but moving into our “growth and income” suite, our mutual funds and ETFs here include American Mutual Fund® (AMF) (our most conservative U.S. growth and income fund), Washington Mutual Investors Fund (WMIF), CGDV Capital Group Dividend Value ETFSM, CGUS Capital Group Core Equity ETFSM, The Investment Company of America® (ICA) and Fundamental Investors® (FI). Our perspective is that these funds have been behaving year-to-date in a way that we think is consistent with their long-term goals of providing more downside resilience than up-market capture.
While not a homogenous group, all six of these funds have trailed the S&P 500 Index during the quarter and year-to-date periods due generally to a combination of dividend payers trailing and “growth stocks” far outpacing “value” counterparts.
An interesting observation here is that while a fund like AMF trailed the S&P 500 by the widest margin during the quarter, it’s classified by Morningstar as Large Value and, as such, was top quartile among peers. It appears to us that when it comes to U.S. equity returns today, beauty is in the eye of the beholder, and over a slightly longer three-year time horizon, all these funds3 have gained more than their peer groups.
Outside the U.S., our international and global funds, on balance, faced difficulty against benchmarks and peers during the quarter. In our international core funds, EuroPacific Growth Fund® (EUPAC) serves as a good example. Longer term results over five- and 10-year periods remain ahead of the ACWI ex USA Index and in line with “growth” peers (Morningstar Foreign Large Growth). However, in the second quarter, supply chain issues weighed on the fund's aerospace and defense holdings, election-related concerns dampened the sentiment around the fund's French holdings, and the fund's limited exposure to China was a drag as its equity market began to show signs of life.
Within Morningstar’s Diversified Emerging Markets peer group, both New World Fund® (NWF) and American Funds® Developing World Growth and Income Fund (DWGI) ended in the bottom quartile of peers during the quarter. Both funds take a distinct approach, with the former investing globally and the latter seeking to balance appreciation with current income to reduce volatility typically associated with emerging markets. For DWGI, a meaningful amount of the difference came from weakness in Chinese biopharma companies that the fund holds after congress proposed the BIOSECURE Act in January.
Looking beyond the recent quarter is always a useful exercise, and the trailing results of all our funds spanning the past decade are shown in a table at the end of this piece.
With the post-pandemic down markets of 2020 and 2022 now firmly planted in the market’s history, it’s tough to tell how much has changed in the world by examining just the five-year annualized total returns of our equity-focused mutual funds. Eight of them, for example, have produced annualized returns in excess of 10% over this timeframe, and seven of them have done so over the past decade. With the post-pandemic rollercoaster we’ve been on, it’s a good reminder that “time, not timing, is what matters” in the market.
We’ve also been pleased with our equity-focused mutual funds’ downside resilience over varying timeframes. This is clear over the past decade, where 75% of available funds produced less downside than their primary index.4 Moreover, the five that produced the greatest downside resilience were, in order, AMF, American Funds® International Vantage Fund (IVE), WMIF, DWGI and American Funds® Global Insight Fund (GIF). All these funds either seek either growth and income or, in the case of IVE and GIF, include conservation of principal as an objective.
Outlook: It’s “and,” not “or”
What should one do with the dilemma of market concentration? Are Apple, Amazon, Alphabet, Meta, Microsoft, NVIDIA and Tesla the only companies that can deliver superior growth and returns in the long term, or should investors put some eggs in other baskets?
As investors, we think it’s foolish to be outright dismissive of large companies, as the paradigm of scale may be changing in a way that favors them. We’re witnessing numerous examples of companies growing revenue with disproportionately lower incremental cost of goods sold.
We also think that many of the technological shifts we’re witnessing ought to first be accessed in the most certain, durable manner. In the semiconductor stack, for example, the earnings visibility of pick-and-shovel providers — Broadcom in components, TSMC in foundry, ASML and Advanced Materials in capital equipment — is high as companies race to build out AI infrastructure.
Beyond that, however, we anticipate a further broadening opportunity set through second- and third-order impacts of AI and related shifts. As an example, many sleepy industrials stand as potential beneficiaries of power requirements.
And then there’s the “and” not directly related to AI. Our investors are also finding opportunities for above-market growth at below-market valuations in industries such as commercial aerospace, hotels, resorts, cruises, industrials companies and payment processors.
In non-U.S. markets, there remains much to be excited about. In Japan, we’re seeing older, more traditional and overlooked companies improving ROE (return on equity) per the government’s urging. In India, there are countless examples of durable mid-cap businesses in manufacturing, chemicals and consumer areas. India has fewer housing starts than both the U.S. and China, setting up massive opportunities for housing developers.
Overall, despite various equity market indices testing recent highs and geopolitical uncertainty high in a domestic election year, we believe that the fundamentals and the macroeconomic backdrop for equities remain robust.
Selectivity will be key, and we remain resolutely focused on investing for the long-term benefit of our clients.
1Includes all equity, balanced and equity income funds offered in American Funds mutual funds or Capital Group ETF vehicles.
2As of June 30, 2024, the weight of NVIDIA as a percentage of total net assets was ranked #5 in GFA, #7 in CGGR and #11 in AMCAP.
3This is referring to all the U.S. growth and income vehicles which have a track record of at least three years. CGUS and CGDV ETFs are excluded.
4As calculated as down capture ratio against primary prospectus benchmark being < 100% for all equity funds with at least a 10-year track record.
Morningstar peer category quartile rankings are based on average annual total returns for Class F-2 shares at net asset value for mutual funds and at market price for ETFs within the funds’ respective Morningstar categories; the funds returned and were ranked as follows among their Morningstar peers as of June 30, 2024:*
-
-
1 year
Fund Total Return Percentile Peers Category AMCAP Fund 24.4% 74th 1162 Large Growth American Balanced Fund 16.3% 14th 740 Moderate Allocation American Funds Developing World Growth and Income Fund 5.1% 88th 804 Diversified Emerging Markets American Funds Global Balanced Fund 10.3% 49th 351 Global Allocation American Funds Global Insight Fund 13.2% 66th 349 Global Large-Stock Blend American Funds International Vantage Fund 7.7% 67th 398 Foreign Large Growth American Mutual Fund 13.9% 57th 1180 Large Value CGUS Capital Group Core Equity ETF 27.1% 12th 1415 Large Blend CGDV Capital Group Dividend Value ETF 24.1% 5th 1180 Large Value CGGO Capital Group Global Growth Equity ETF 22.5% 28th 343 Global Large-Stock Growth CGGR Capital Group Growth ETF 30.8% 48th 1162 Large Growth CGXU Capital Group International Focus Equity ETF 10.7% 39th 398 Foreign Large Growth Capital Income Builder 10.1% 51st 351 Global Allocation Capital World Growth and Income Fund 18.3% 35th 349 Global Large-Stock Blend EuroPacific Growth Fund 10.7% 39th 398 Foreign Large Growth Fundamental Investors 26.6% 15th 1415 Large Blend International Growth and Income Fund 11.0% 49th 734 Foreign Large Blend New Perspective Fund 18.9% 47th 343 Global Large-Stock Growth New World Fund 10.9% 62nd 804 Diversified Emerging Markets SMALLCAP World Fund 7.0% 45th 147 Global Small/Mid Stock The Growth Fund of America 30.5% 50th 1162 Large Growth The Income Fund of America 10.0% 88th 308 Moderately Aggressive Allocation The Investment Company of America 27.4% 10th 1415 Large Blend The New Economy Fund 27.6% 13th 343 Global Large-Stock Growth Washington Mutual Investors Fund 21.4% 61st 1415 Large Blend -
5 years
Fund Total Return Percentile Peers Category AMCAP Fund 11.8% 83rd 1019 Large Growth American Balanced Fund 8.7% 20th 649 Moderate Allocation American Funds Developing World Growth and Income Fund 1.6% 79th 646 Diversified Emerging Markets American Funds Global Balanced Fund 5.5% 40th 320 Global Allocation American Funds Global Insight Fund 9.4% 50th 299 Global Large-Stock Blend American Funds International Vantage Fund 6.9% 41st 331 Foreign Large Growth American Mutual Fund 10.0% 47th 1035 Large Value CGUS Capital Group Core Equity ETF N/A N/A N/A Large Blend CGDV Capital Group Dividend Value ETF N/A N/A N/A Large Value CGGO Capital Group Global Growth Equity ETF N/A N/A N/A Global Large-Stock Growth CGGR Capital Group Growth ETF N/A N/A N/A Large Growth CGXU Capital Group International Focus Equity ETF N/A N/A N/A Foreign Large Growth Capital Income Builder 6.2% 28th 320 Global Allocation Capital World Growth and Income Fund 9.8% 43rd 299 Global Large-Stock Blend EuroPacific Growth Fund 5.9% 53rd 331 Foreign Large Growth Fundamental Investors 13.7% 55th 1192 Large Blend International Growth and Income Fund 6.3% 43rd 639 Foreign Large Blend New Perspective Fund 12.3% 27th 277 Global Large-Stock Growth New World Fund 6.6% 17th 646 Diversified Emerging Markets SMALLCAP World Fund 6.9% 40th 117 Global Small/Mid Stock The Growth Fund of America 15.0% 55th 1019 Large Growth The Income Fund of America 7.0% 79th 277 Moderately Aggressive Allocation The Investment Company of America 14.5% 34th 1192 Large Blend The New Economy Fund 11.6% 37th 277 Global Large-Stock Growth Washington Mutual Investors Fund 12.8% 67th 1192 Large Blend -
10 years
Fund Total Return Percentile Peers Category AMCAP Fund 10.8% 87th 794 Large Growth American Balanced Fund 8.2% 13th 493 Moderate Allocation American Funds Developing World Growth and Income Fund 1.1% 88th 423 Diversified Emerging Markets American Funds Global Balanced Fund 4.7% 30th 240 Global Allocation American Funds Global Insight Fund 8.5% 34th 196 Global Large-Stock Blend American Funds International Vantage Fund 5.8% 34th 196 Foreign Large Growth American Mutual Fund 9.5% 23rd 809 Large Value CGUS Capital Group Core Equity ETF N/A N/A N/A Large Blend CGDV Capital Group Dividend Value ETF N/A N/A N/A Large Value CGGO Capital Group Global Growth Equity ETF N/A N/A N/A Global Large-Stock Growth CGGR Capital Group Growth ETF N/A N/A N/A Large Growth CGXU Capital Group International Focus Equity ETF N/A N/A N/A Foreign Large Growth Capital Income Builder 5.1% 19th 240 Global Allocation Capital World Growth and Income Fund 7.8% 52nd 196 Global Large-Stock Blend EuroPacific Growth Fund 5.1% 48th 221 Foreign Large Growth Fundamental Investors 11.8% 44th 888 Large Blend International Growth and Income Fund 3.8% 66th 421 Foreign Large Blend New Perspective Fund 10.8% 20th 188 Global Large-Stock Growth New World Fund 5.5% 3rd 423 Diversified Emerging Markets SMALLCAP World Fund 7.5% 6th 74 Global Small/Mid Stock The Growth Fund of America 13.2% 60th 794 Large Growth The Income Fund of America 6.4% 68th 228 Moderately Aggressive Allocation The Investment Company of America 11.5% 53rd 888 Large Blend The New Economy Fund 10.8% 19th 188 Global Large-Stock Growth Washington Mutual Investors Fund 11.3% 56th 888 Large Blend
-
*Source: Capital Group, based on Morningstar data. The Morningstar rankings do not reflect the effects of sales charges, account fees or taxes. Past results are no guarantee of results in future periods. While American Funds Class F-2 shares do not include fees for advisor compensation and service provider payments, the share classes represented in the Morningstar category have varying fee structures and can include these and other fees and charges, resulting in higher expenses.
Fund results and analysis
Index comparisons:
The 20 equity-focused American Funds and their primary benchmarks in the results are as follows, unless otherwise indicated: AMCAP Fund®, American Mutual Fund®, Fundamental Investors®, The Growth Fund of America®, The Investment Company of America® and Washington Mutual Investors Fund (S&P 500 Index); American Balanced Fund® (60% S&P 500 Index and 40% Bloomberg U.S. Aggregate Index); American Funds® Global Balanced Fund (60% MSCI All Country World Index and 40% Bloomberg Global Aggregate Index); Capital Income Builder® (70%/30% MSCI All Country World Index/Bloomberg U.S. Aggregate Index); The Income Fund of America® (65%/35% S&P 500 Index/Bloomberg U.S. Aggregate Index); Capital World Growth and Income Fund®, The New Economy Fund®, New Perspective Fund® and New World Fund® (MSCI All Country World Index); American Funds® Developing World Growth and Income Fund (MSCI Emerging Markets Index); EuroPacific Growth Fund® and International Growth and Income Fund (MSCI All Country World ex USA Index); SMALLCAP World Fund® (MSCI All Country World Small Cap Index); American Funds® International Vantage Fund (MSCI EAFE [Europe, Australasia, Far East] Index); American Funds® Global Insight Fund (MSCI World Index).
The eight Capital Group equity-focused ETFs and their primary benchmarks in the results are as follows: CGBL Capital Group Core Balanced ETF (60%/40% S&P 500 Index/Bloomberg U.S. Aggregate Index); CGDG Capital Group Dividend Growers ETF, CGGO Capital Group Growth Equity ETF (MSCI All Country World Index); CGIE Capital Group International Equity ETF (MSCI EAFE [Europe, Australasia, Far East] Index); CGUS Capital Group Core Equity ETF, CGGR Capital Group Growth ETF, CGDV Capital Group Dividend Value ETF (S&P 500 Index); CGXU Capital Group International Focus Equity ETF (MSCI All Country World ex USA Index).
- Class F-2 shares (expiration: 1/1/2025)
- Class F-2 shares were first offered on 8/1/2008.
- When applicable, returns for less than one year are not annualized, but calculated as cumulative total returns.
- YTD (year-to-date return): For the period from January 1 of the current year to the date shown or from inception date if first offered after January 1 of the current year.
The BIOSECURE Act is a legislative bill that aims to prevent executive agencies from contracting with or providing loans or grants to any company that has commercial ties with a “biotechnology company of concern.” It’s a bipartisan initiative introduced in the Senate and the House to safeguard national security and public health.
Down capture ratio is a statistical measure of an investment manager's overall performance in down-markets.
Equal weight: To compare different sets of stocks, equal weighting is used to assign the same importance to each stock in the portfolios and base them on their results rather than their size.
Bloomberg Global Aggregate Index represents the global investment-grade fixed income markets. This index is unmanaged, and its results include reinvested distributions but do not reflect the effect of sales charges, commissions, account fees, expenses or U.S. federal income taxes.
Bloomberg U.S. Aggregate Index represents the U.S. investment-grade fixed-rate bond market. This index is unmanaged, and its results include reinvested dividends and/or distributions but do not reflect the effect of sales charges, commissions, account fees, expenses or U.S. federal income taxes.
MSCI All Country World Index (ACWI) is a free float-adjusted market capitalization weighted index that is designed to measure equity market results in the global developed and emerging markets, consisting of more than 40 developed and emerging market country indexes.
The MSCI All Country World ex USA Growth Index captures large and mid-cap securities exhibiting overall growth style characteristics across 22 Developed Markets (DM) countries and 24 Emerging Markets (EM) countries. DM countries include: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the UK. EM countries include: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Kuwait, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Saudi Arabia, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates. The growth investment style characteristics for index construction are defined using five variables: long-term forward EPS growth rate, short-term forward EPS growth rate, current internal growth rate and long-term historical EPS growth trend and long-term historical sales per share growth trend.
MSCI All Country World ex USA Index is a free float-adjusted market capitalization weighted index that is designed to measure equity market results in the global developed and emerging markets, excluding the United States. The index consists of more than 40 developed and emerging market country indexes. Results reflect dividends gross of withholding taxes through December 31, 2000, and dividends net of withholding taxes thereafter. This index is unmanaged, and its results include reinvested dividends and/or distributions but do not reflect the effect of sales charges, commissions, account fees, expenses or U.S. federal income taxes.
The MSCI All Country World ex USA Value Index captures large and mid-cap securities exhibiting overall value style characteristics across 22 Developed and 24 Emerging Markets countries. DM countries include: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the UK. EM countries include: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Kuwait, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Saudi Arabia, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates. The value investment style characteristics for index construction are defined using three variables: book value to price, 12-month forward earnings to price and dividend yield.
MSCI EAFE® (Europe, Australasia, Far East) Index is a free float-adjusted market capitalization weighted index that is designed to measure developed equity market results, excluding the United States and Canada. Results reflect dividends net of withholding taxes. This index is unmanaged, and its results include reinvested dividends and/or distributions but do not reflect the effect of sales charges, commissions, account fees, expenses or U.S. federal income taxes.
The Russell 1000® Growth Index measures the performance of the large-cap growth segment of the US equity universe. It includes those Russell 1000 companies with relatively higher price-to-book ratios, higher I/B/E/S forecast medium term (2 year) growth and higher sales per share historical growth (5 years). The Russell 1000® Growth Index is constructed to provide a comprehensive and unbiased barometer for the large-cap growth segment. The index is completely reconstituted annually to ensure new and growing equities are included and that the represented companies continue to reflect growth characteristics. S&P 500 Index is a market capitalization-weighted index based on the average weighted results of approximately 500 widely held common stocks.
The Russell 1000® Value Index measures the performance of the large-cap value segment of the US equity universe. It includes those Russell 1000 companies with relatively lower price-to-book ratios, lower I/B/E/S forecast medium term (2 year) growth and lower sales per share historical growth (5 years). The Russell 1000® Value Index is constructed to provide a comprehensive and unbiased barometer for the large-cap value segment. The index is completely reconstituted annually to ensure new and growing equities are included and that the represented companies continue to reflect value characteristics.
S&P 500 Index is a market capitalization-weighted index based on the results of approximately 500 widely held common stocks. This index is unmanaged, and its results include reinvested dividends and/or distributions but do not reflect the effect of sales charges, commissions, account fees, expenses or U.S. federal income taxes.