Last week marked the best week for U.S. equities since November 2020, with the S&P 500 erasing almost half of its year-to-date losses. The S&P 500 is now only down 6.4% versus its max drawdown of 13% in 2022.

However, despite solid performance at the aggregate level, results at the constituent level indicate further improvement is needed for a full recovery. Year-to-date, about 2/3 of the stocks in the S&P 500 are down and approximately 82% of the index’s stocks have seen a correction of 10% or more. In other words, the S&P 500’s surge last week was driven by a recovery in the mega-cap tech stocks – the hardest hit part of the market this year – rather than the average stock in the index. Going forward, earnings growth will be key for performance to improve; year-to-date the S&P 500 is down 6.4%, with earnings growth contributing +3.7ppts and multiple growth contributing -10.1ppts.

Earnings will be key given a macroeconomic backdrop of persistent supply chain issues, geopolitical tensions and a potential slowdown in demand stemming from higher prices. However, net upward revisions to S&P 500 company earnings have fallen to 6.8% in March from an average of 21.4% in January and February, reflecting management downgrades to sales and profit forecasts amid higher input costs. 

These varying dynamics are also reflected in sector level returns. In the chart below, we show the year-to-date dispersion of S&P 500 sector returns. Corrections have not been equally distributed among each sector. The magnitude of dispersion has been largest among the growth and tech dominated sectors, as higher rates have compressed valuations and put increased scrutiny on profitability. On the other hand, the cyclically-oriented sectors and defensive sectors have had tighter dispersion, with valuations staying more resilient relative to those of their growth peers. Additionally, along with the economic rebound in the U.S., higher rates should boost earnings growth for financials, while higher commodity prices should offer further support for corporate profits in the materials, industrial and energy sectors.

Given current economic conditions, value should outperform growth during the coming months. However, investors should not avoid growth all together. Instead, investors should take a more cautious approach with a preference for high quality and profitable growth names rather than those that are struggling to generate earnings.

Lots of action beneath the surface since the start of the year
S&P 500 sector price return dispersion indexed to 12/31/2021

Source: FactSet, J.P. organ Asset Management.  All data are as of March 21, 2022.

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