In this episode of The Market Measure, we review a resurgent S&P 500, check in on the performance of trend-following equities, dig into two factor indices—the S&P 500 High Beta Index and S&P 500 Low Volatility Index—that took a very different route to the same destination, make a detour for a look at the performance of select international equities and find out what VIX is telling us about the coming summer.
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[TRANSCRIPT]
Ben Vörös:
Hello, I’m Ben Vörös,
Dasha Selivanova:
and I'm Dasha Selivanova.
Ben Vörös:
Coming up, we review a resurgent S&P 500 and its place on the global leaderboard. Check in on the performance of trend-following equities, dig into two factor indices that took a very different route to the same destination and find out what VIX is telling us about the coming summer.
At the time of recording, the blue-chip benchmark has poked its head back above 6,000 and currently sits just around 2% below the last record high observed on February 19, 2025.
Sentiment may have played its part, but corporate earnings have also been supportive. As we approach the end of the second quarter, the proportion of S&P 500 constituents beating earnings estimates in their quarterly reports stands at 77%, above the long-term average of 73%.
Dasha Selivanova:
While blue chips moved firmly in the black year-to-date, mid and small caps are still underwater. Both the S&P MidCap 400 and the S&P SmallCap 600 extended their Q1 underperformance against the S&P 500 in Q2. Year-to-date, the S&P MidCap 400 is down 2% and the S&P SmallCap 600 is down 5%, lagging the S&P 500 by 5% and 8%, respectively.
The underperformance of smaller firms was uniform across sectors, with all small-cap sectors and 10 of 11 mid-cap sectors lagging the large-cap ones. Mid-cap Utilities was the only outlier; it has outperformed its large-cap counterpart by 3%.
The best-performing factor by far this year has been Momentum, and the S&P 500 Momentum Index has continued to power ahead, outperforming its parent index by 10% so far in 2025. Part of that was due to increasing valuations, but another part was down to fundamentals. As this chart shows, although the trailing average P/E ratio of constituents in the S&P 500 Momentum Index is today slightly higher than that of The 500™, this margin has not widened nearly to the same degree that the factor itself has outperformed. In simple terms, Momentum outperformance was not just a function of its constituents becoming more expensive.
Ben Vörös:
Speaking of divergences, two other factor indices, the S&P 500 High Beta and the S&P 500 Low Volatility, are both 2% ahead of the S&P 500 so far in 2025. They took very different paths to get there. Having lagged the S&P 500 by 10% between the end of 2024 and early April this year, High Beta was the best performing among our reported S&P 500 factors this quarter.
Meanwhile, the star performer of Q1, Low Volatility, has given back some of its relative winnings.
Sectors go a long way toward explaining the divergence. Information Technology, this quarter's best performing sector, is currently the largest overweight in the S&P 500 High Beta Index, and it is simultaneously the largest underweight in Low Volatility. Conversely, Consumer Staples, which was one of this quarter’s sector laggards, is a large overweight in Low Volatility and a large underweight in High Beta.
Meanwhile, the outperformance of international equities relative to the U.S. has continued. The S&P Europe 350 Index, which outperformed the S&P 500 by 15% in USD in Q1, leads the U.S. benchmark by another 3% so far in Q2. The S&P Latin America 40 is also having a good quarter, up by 11% and the best performing among our major international regions.
It has a 25% total return in USD so far in 2025.
Will the calm we've seen in the past few weeks persist through the summer or should you have sold in May and gone away? The equity derivatives markets are indicating signs of confidence or perhaps complacency.
VIX, which measures the implied volatility of the S&P 500 for the next 30 days, has been firmly below 20 since the end of May.
The index was recording levels over 50 as recently as early April.
It may be worthwhile to be ready for some bumps on the road. With summer around the corner, liquidity may be lower as the heads of trading desks take their vacations, and I would not rule out some holiday jitters. Volatility is currently down, but if it resurfaces, diversification across sectors, factors and geographies can be a powerful tool that may deliver a smoother ride.
And that's it from us.
Dasha Selivanova:
You've been watching
Ben Vörös:
The Market Measure.
