The S&P Kensho New Economy Indices seek to track the industries and innovation of the Fourth Industrial Revolution
Global equity markets had a lackluster second quarter this year as they navigated a challenging macro environment. The S&P 500® was down 16% this quarter, posting the worst first-half performance since 1970, with three of its constituent sectors also having their worst first-half performance on record. Other major indices focused on U.S. small-cap equities, global equities and emerging market equities also had multi-year record losses during this first half. The story in the fixed income space was similar, as the Fed's tightening cycle switched into high gear after a 75 bps overnight rate hike in June, the biggest hike since 1994. The speed of rising rates has weighed heavily on the bond and credit markets, as various global and emerging market bond aggregates posted their worst first-half declines on record. The knock-on effects of rising rates, together with soaring inflation, pulled growth equities lower. The Q2 underperformance of the S&P 500 Growth versus the S&P 500 Value (-9.5%) was the worst since 2001, and so was the S&P 500 Growth's underperformance versus the S&P 500 (-4.7%). To round off this broad pullback across various market segments, consumer sentiment also fell sharply due to growing concerns of a recession ahead, despite a strong labor market. This combination of uncertainties, especially around underperforming growth equities and downcast investor expectations that S&P Kensho Indices are particularly sensitive to, was a recipe for a difficult Q2 2022.
TOP THREE FROM ACROSS THE NEW ECONOMIES
Clean Energy (-7.7%): KENERGY, which focuses on clean energy production at a utility scale, has had a volatile year so far, similar to the oil complex. After posting one of the best Kensho subsector returns in Q1 2022, it reversed those gains in Q2, while still holding the top spot as the best quarterly performer among Kensho subsectors. Its overweight in Utilities adds a defensive characteristic that likely helped its performance during this market pullback. Despite the recent swings, KENERGY has been relatively stable and rangebound over the past year, and it is now close to its level from one year prior. Brazilian electric company EBS was the top contributor, primarily because of strong investor demand as the company takes steps to go private. Azure Power and Enel Americas were the index’s biggest underperformers, with no clear stock-specific catalysts to highlight.
Smart Borders (-9.4%): KDMZ, focused on securing borders and critical infrastructure, drifted sideways, ending the quarter nearly flat compared to late January levels. Given the heavy weight of Industrials (~40%) within the index, the chorus of reports of an impending recession have likely weighed on its performance. Griffon Corp, a top performer, had a solid Q1 2022 earnings season that beat consensus analyst estimates and saw its stock gain 37% over the week following the announcement, ending the quarter up 40%. Teledyne Tech was the biggest quarterly underperformer in the index (-20% in Q2 2022), erasing its gains from the brief pickup in the aftermath of the start of the conflict in Ukraine. Embraer was another notable underperformer, not helped by a weak Q1 earnings report, losing 31% in the quarter and now close to a one-year low.
Space (-10.7%): After moving within a narrow price range since December 2020, KMARS trended lower for most of the quarter, eventually falling below this range. Rising rates have likely affected the bottom line of this innovative industry as it navigates its relatively early stages of growth. Failed payload delivery added to the woes of Astra Space, which has been plagued by investigations, driving its stock price 65% lower this quarter. Geospatial intelligence firm Maxar was another notable underperformer, registering a return of -33% for the quarter, retracing the bounce in the aftermath of the start of the Russia-Ukraine conflict in February. Northrop Grumman and Aerojet RocketDyne were the top positive contributors to the index performance. Despite Lockheed's deal to acquire Aerojet being scrapped in February, a strong Q1 earnings report and upbeat sales have been supportive for Aerojet's stock price.