Stock Market Momentum: Growth Stocks Lead the Charge in Q1 – Is the Run Sustainable?

San Francisco, California – The momentum from last year’s stock market has carried over into the first quarter, with growth stocks leading the charge once again across various market caps and geographies. However, many investors are expressing concern as the fundamentals might not fully justify the current levels of exuberance. Countries like Germany, the UK, and Japan are either in – or on the verge of – a recession. On top of that, China’s growth is facing significant pressure, global trade is slowing down, geopolitical risks are high, and debt levels are steadily increasing. While the US economy has shown resilience, it is expected to decelerate in 2024. The S&P 500, fueled by an extraordinary concentration in mega-cap technology, has left other asset classes trailing behind in recent years. With all these factors in play, doubts arise around the sustainability of the S&P 500’s exceptional outperformance.

In the first quarter, FMI’s Small Cap Strategy outperformed, with growth surpassing value by over 4%. The top-performing stocks included Core & Main Inc., Gates Industrial Corp. PLC, and nVent Electric PLC, while others like Plexus Corp., Robert Half Inc., and Genpact Ltd. lagged behind. Despite the lag in Small/SMID Cap stocks in recent years, the relative valuations have become more enticing.

Similarly, FMI’s Large Cap Strategy also saw gains in the first quarter, outperforming the S&P 500 Index and iShares Russell 1000 Value ETF1. Sectors like Finance, Producer Manufacturing, and Consumer Durables drove FMI’s performance, while others like Health Services, Health Technology, and Electronic Technology underperformed. Micron Technology Inc., Progressive Corp., and Eaton Corp. PLC were among the top contributors, while UnitedHealth Group Inc., Sony Group Corp. ADR, and Dollar Tree Inc. faced challenges.

The FMI All Cap Strategy gained in the first quarter, with sectors like Finance, Consumer Durables, and Producer Manufacturing contributing to performance, while others like Commercial Services, Electronic Technology, and Health Services detracted. Notable stocks like Micron Technology Inc., Carlisle Cos Inc., and Berkshire Hathaway Inc. Cl B made positive contributions, while others like Robert Half Inc., Sony Group Corp. ADR, and Koninklijke Philips N.V. ADR struggled.

Looking at the international equity strategies, FMI saw gains on a currency-hedged and currency-unhedged basis in the first quarter, outperforming certain ETF gains. The International Strategies’ exposure in the Transportation Sector was beneficial, while the lack of direct exposure in sectors like Utilities and Non-Energy Minerals had a slightly negative impact. Top performers included Safran S.A., Yokogawa Electric Corp., and Arch Capital Group Ltd., while others like Smiths Group PLC, NOF Corp., and Smith & Nephew PLC lagged.

As the article highlights various investment strategies and outcomes, it poses critical questions around the sustainability of the market’s current trajectory. The analysis sheds light on potential risks and opportunities in the financial landscape, offering insights into the performance of different equity strategies and their alignment with market conditions and trends.