Mega Caps and Momentum
- Mega Cap Resilience Tested in April Correction
- Momentum Outperforms – Should We Be Concerned?
- Momentum – Positive Growth & Profitability, More Expensive & Volatile
Mega Cap Resilience Tested in April Correction
April has been a volatile month with world developed markets down -3.83%.1 Figure 1 provides a perspective on the top 10 largest names by market capitalisation in the MSCI Word Index, in terms of the run up to the end of March and the correction in April. Most of the top 10 names generated strong performance in the 6 months to the end of Q1 2024 – on average up 24.6%. In April we have seen greater dispersion across the mega caps and despite some better-than-expected company updates from the likes of Microsoft, Amazon, Alphabet, and Tesla the equally weighted average was down -0.7%.2
Figure 1: Top 10 Stocks Fall in April Despite Mostly Better Than Expected Company Updates
| Company | Sector | MSCI World Index Weight | Total Return % 30 Sep 2023 to 31 Mar 2024 | Total Return % April 2024 | April Company Update & Investor Reaction |
| Apple | Information Technology | 4.9 | 0.4 | -0.7 | Not reported |
| Microsoft | Information Technology | 4.1 | 33.8 | -7.5 | (+) |
| Amazon | Consumer Discretionary | 2.2 | 41.9 | -3.0 | (+) |
| NVIDIA | Information Technology | 2.0 | 107.7 | -4.4 | Not Reported |
| Alphabet A | Communication Services | 1.4 | 15.3 | 7.9 | (+) |
| Tesla | Consumer Discretionary | 1.3 | -29.7 | 4.3 | (+) |
| Alphabet C | Communication Services | 1.3 | 15.5 | 8.1 | (+) |
| Meta | Communication Services | 1.2 | 61.9 | -11.4 | (-) |
| Exxon Mobil | Energy | 0.9 | 0.7 | 1.7 | (+) |
| United Health | Health Care | 0.9 | -1.2 | -2.2 | (+) |
| Totals / Averages | 20.1 | 24.6 | -0.7 |
Source: State Street Global Advisors, FactSet as of 30 April 2024. The MSCI World Index Weight as at 30 September 2023. Investor reaction to the company update reflects investor price reaction to the company updates in April. Performance reflects 6 months up to 31 March 2024 and the correction in the month of April 2024. Index returns are unmanaged and do not reflect the deduction of any fees or expenses. Index returns reflect all items of income, gain and loss and the reinvestment of dividends and other income as applicable. Performance returns are in USD. This information should not be considered a recommendation to invest in a particular sector or to buy or sell any security shown. It is not known whether the sectors or securities shown will be profitable in the future.
Momentum Stands out in Recent Market Performance
Figure 2 highlights recent market theme and sector performance. It highlights the recent equity market run to 31 March 2024 and the subsequent sell off in April. Generally, the sectors and themes with the strongest performance returns in the 6 months leading into April had the biggest correction in April. The best performing style in the 6 months into 31 March 2024 was Momentum (+33.8%) which had a -4.1% correction in April.
Momentum Outperforms – Should We Be Concerned?
The stock selection principle for momentum is simple – overweight the stocks which have outperformed the most with the expectation they will continue to drive further outperformance . The anomaly has been well documented in the literature and is often explained in terms of investor herding, confirmation bias, and limits to arbitrage. The basket of momentum stocks will evolve over time, tilting towards the themes that investors are rerating the most. To the extent that momentum can move with underlying trends, the risks to the momentum style can be partly assessed in terms of its fundamental characteristics.
Momentum – Positive Growth & Profitability, More Expensive & Volatility
Figure 3 provides a snapshot on some Momentum fundamentals as at 30 April 2024. In summary, Momentum exhibits:
- Positive Growth: Momentum is currently tilting towards stocks that have exhibited greater historical sales and Earnings-per-share (EPS) growth and are expected to deliver greater EPS growth in the next 3-5 years.
- Positive Profitability: Momentum is tilted towards higher margin, higher return on equity (ROE), lower debt/equity. What is not to like? Perhaps more concerning are both valuations and volatility.
- Higher Valuations: the dividend yield, price to cash flow, price to book and price to sales are all more expensive than the MSCI World Index.
- Higher Volatility: The MSCI World Momentum Index volatility is currently 10% more than the MSCI World Index.
- Concentrated Risk Exposures: The MSCI World Momentum Index has a higher concentration in technology +30% or +7.7% more than the MSCI World Index. It is underweight or has very little exposure to less cyclical sectors like Staples, Utilities and Real Estate.
Figure 3: Momentum Fundamentals vs. MSCI World
| Characteristic | MSCI World Momentum Index | MSCI World Index | Difference |
| Hist 3Yr Sales Growth | 17.1 | 14.9 | 2.2 |
| Hist 3Yr EPS Growth | 24.3 | 17.5 | 6.7 |
| Est 3-5 Yr EPS Growth | 17.3 | 12 | 5.3 |
| ROE | 31.6 | 23.5 | 8.1 |
| Operating Margin | 24.2 | 22.3 | 1.9 |
| Total Debt / Equity | 170 | 181 | -11 |
| Dividend Yield | 1.13 | 1.83 | -0.7 |
| Price/Cash Flow | 17.2 | 13.1 | 4.1 |
| Price/Book | 3.69 | 3.13 | 0.56 |
| Price/Sales | 2.5 | 2.2 | 0.3 |
| Volatility | 13.56 | 12.31 | 1.25 |
| Sectors | MSCI World Momentum | MSCI World | Difference |
| Technology | 30.9 | 23.2 | 7.7 |
| Industrials | 13.5 | 11.3 | 2.2 |
| Discretionary | 12.8 | 10.6 | 2.2 |
| Communication | 12.4 | 7.5 | 4.9 |
| Financials | 10.5 | 15.4 | -4.9 |
| Health Care | 10.1 | 12 | -1.9 |
| Materials | 4.1 | 3.9 | 0.1 |
| Energy | 1.7 | 4.7 | -3 |
| Staples | 1.6 | 6.7 | -5.1 |
| Utilities | 1.5 | 2.5 | -1 |
| Real Estate | 0.9 | 2.2 | -1.3 |
Source: FactSet, State Street Global Advisors as of 30 April 2024.
The overweight to the technology sector has been the right call in recent times but as equity market volatility picks up in April it is worth thinking about sector diversification. Figure 4 provides a historical perspective on sector outperformance in down months. The analysis highlights the excess return for the more defensive sectors like Staples and Healthcare compared to the more cyclical sectors like Materials and Financials.
Figure 4: Sector Excess Performance Returns In Down Markets
| Sector | Negative Return Month | Month Return <-5% | Month Return <-10% |
| Consumer Staples | 2.0% | 4.3% | 6.2% |
| Health Care | 1.5% | 3.7% | 5.2% |
| Communication | -0.1% | 1.1% | 1.6% |
| Utilities | 1.4% | 3.3% | 1.3% |
| Consumer Discretionary | -0.2% | -0.5% | 1.3% |
| Technology | -1.0% | -2.4% | 0.0% |
| Energy | 0.3% | 0.8% | -3.0% |
| Industrials | 0.0% | -0.7% | -3.3% |
| Materials | -0.4% | -0.8% | -3.4% |
| Financials | -0.7% | -1.6% | -4.3% |
Source: MSCI, FactSet, State Street Global Advisors as of 30 April 2024. Performance returns calculated using MSCI World sectors in USD. Excess returns are calculated for months when the MSCI World is negative, when the MSCI monthly return is less than -5% and when the MSCI World is less than negative -10%. Calculations are based on monthly data from 30 June 2000 to 30 April 2024. Index returns are unmanaged and do not reflect the deduction of any fees or expenses. Index returns reflect all items of income, gain and loss and the reinvestment of dividends and other income as applicable. This information should not be considered a recommendation to invest in a particular sector or to buy or sell any security shown. It is not known whether the sectors or securities shown will be profitable in the future.
Bottom Line
April has been a volatile month and is a reminder of the inherent risk in equity markets. Momentum investing has been one of the better performing strategies but is now more expensive, more volatile and more concentrated in cyclical sectors than the broader MSCI World Index.