Which sectors and factors have shown the strongest performance trends through recent market shifts? S&P DJI’s Ben Vörös joins Anu Ganti to explore the potential of indices to help market participants address concerns around concentration and unpack performance highlights from the first half of 2025.
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Ben Vörös:
Volatility and recovery were major storylines for U.S. equities in the first half of the year, leading some market participants to take a closer look at defensive strategies.
Hello, I'm Ben Vörös of S&P Dow Jones Indices, and I'm joined by my colleague, Anu Ganti, to discuss the latest on concentration, home bias and the role of U.S. equities in Europe and other global markets, and which sectors and factors have outperformed and what this could mean for market participants with an eye on defense.
Thanks for joining, Anu.
Anu Ganti:
Great to be here.
Ben Vörös:
So, let's kick off with a look at how international and U.S. equity markets have behaved in the first half of 2025.
Anu Ganti:
Yes, well, it was really a tale of two markets in the first half of the year. The S&P 500® recovered by more than 20% since the depths of the April lows that we saw. And we all remember the tariff-related tumult then. We saw continued record highs for the S&P 500, including on the final day of the quarter in Q2. So, really remarkable recovery here. Also, volatility remained relatively low, with the VIX® closing the quarter below the 17 handle.
Now, what was particularly interesting was just the differences in size performance, looking at the U.S. and Europe. So, for example, in the U.S., we saw that mid and small caps underperformed large caps, but the S&P 400® and the S&P 600® were still up 7% and 5%. So, you saw this broadening of the rally. Meanwhile, in Europe, we actually saw that mid and smaller caps outperformed versus the S&P Europe 350®. So, that was an interesting divergence to see across the size spectrum, both in the U.S. and Europe.
Now, coming to sentiment, we all remember the defensive sentiment in the first quarter, but that changed in the second quarter, and we saw that Information Technology and Communication Services were the leading sectors.
And coming to factors, which we'll talk about in a bit, we saw that high beta and momentum were the leaders. And, in fact, high beta overtook momentum outperforming the S&P 500 in Q2. So, these are some of the key themes that we saw in the first half of the year.
Now, looking internationally, we saw that the S&P Europe 350 actually outperformed, up 24% in U.S. dollar terms. And perhaps the weakness of the dollar may have been a tailwind here. And as we look ahead, as we have started H2, uncertainties remain, including tariff-related uncertainties, geopolitical risk, the future course of central banks, including the Fed in the U.S. and central banks all around the world, and inflation. So, these are some of the macro indicators that we're looking at as we go into H2.
Ben Vörös:
That's very interesting. And picking up on what you said about U.S. equity markets, why does it matter for European and other international market participants?
Anu Ganti:
Excellent question. So there's a couple of considerations here. One is when looking at the economic exposure of a company, we can think beyond the country of domicile. One example for you is the S&P 500. All U.S.-domiciled companies, but roughly 70% of the revenue is coming from the U.S. So, it's important to consider the geographic breakdown of revenues. So, 70% of that is coming from the U.S. The remainder is coming from the rest of the world, including roughly 10% from Europe. So, this may be potentially relevant for European market participants to consider when looking at their opportunity set.
Also, interestingly, we saw that our S&P 500 Foreign Revenue Exposure Index has outperformed versus the S&P 500 U.S. Revenue Exposure Index. Part of that tailwind may have been the weakness of the dollar that we talked about, potentially benefiting multinational companies that get a greater share of their revenues from overseas. So, that's revenues.
The other consideration is, of course, home bias, and important for European investors and market participants to keep that in mind. And we can apply a country and sector perspective for this. So, for example, if you look at our S&P World Index, the U.S. makes up more than 70% of the country weight. If you look at sectors, the S&P 500 Information Technology is actually larger than that of China, which is pretty remarkable, if you think about it.
So, looking at the S&P Europe 350, for example, it has greater overweights to, for example, Financials, Industrials and Health Care. And, historically, our research has shown that adding U.S. exposure has potentially helped to mitigate that risk and offer that diversification.
Ben Vörös:
Switching direction a little, mega caps and concentration have been at the forefront of market participants' minds. How can indices help allay and handle some of these concerns?
Anu Ganti:
Excellent question. And you're right that mega caps have been top of mind in 2023, 2024, in the first half of this year, with our S&P 500 Top 50 up 14%, outperforming the S&P 500. So, we've seen market concentration concerns, relatively high market concentration, if you look compared to history. We've also seen extremes in momentum.
So, we really have these unusually stretched extensions in these trends. And, historically, we've seen that mean reversion, which, of course, is difficult to predict in advance. So, this may be an interesting time to be examining equal-weight strategies, which, for example, have that exposure to small size. Also have that anti-momentum bias. And, historically, we've seen that, after peaks in market concentration, equal weight has tended to outperform. So, that may be something interesting to examine, given the current circumstances in the market. And, of course, we know that equal weight has outperformed over the long term, when looking at history.
Now, coming to a sector perspective, we've actually seen a similar trend. And we can think of sectors as tools. For example, we have cap-weighted sectors. We have equal-weighted sectors. And, historically, we've seen that, after peaks in sector concentration, equal-weighted sectors have tended to outperform. Information Technology is a great example of this.
And coming back to my earlier point about the geographic breakdown of revenues, this varies across sectors. For example, Information Technology had the lowest domestic percentage of sales, while Utilities had the highest. So, it's important to keep these considerations in mind for a sector level as well.
Ben Vörös:
Earlier, you mentioned that high beta actually overtook momentum, at least in the U.S., to be the top-performing factor. But, how has the relationship between high beta on the one hand, and defensive sectors and factors on the other, evolved over the year? And what that relationship means for market participants?
Anu Ganti:
Yes, and coming back to the point earlier about the tale of two markets, we certainly saw that at the factor level. In Q1, if you recall, we saw that low volatility outperformed, dividend strategies outperformed, some more defensive factors did well. Meanwhile, we saw the opposite in Q2, with the return of risk-on sentiment, where momentum outperformed, high beta outperformed, overtaking momentum. So, real notable reversal here. And we can also look at sectors as drivers of the factor performance. For example, high beta's greatest sector overweight is in Information Technology, and that was the leading sector.
Now, coming to your point about factors, momentum has been really interesting to watch globally. We saw that momentum has outperformed in the U.S. It has outperformed in Europe. But, not so much the case in developing markets and emerging markets, including China. So, the diverging trend of momentum in the U.S. and developed markets versus emerging markets and China will be something to closely watch as we close out the rest of the year.
Ben Vörös:
Thanks a lot for your insights, Anu. It was really interesting to hear about sector and factor dynamics in the first half of 2025.
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