SEI Forward: Faster, higher, stronger

This edition of Forward will look at the current state of capital markets through the lens of the Olympic maxim.

Faster!

While the winners of the 100-meter dash will be crowned the world’s fastest man and woman, in markets, nothing kept up with the price action of Nvidia. Data from Bloomberg shows that the center of artificial intelligence (AI) mania added nearly $1 trillion to its market value in the fastest time ever. The chip-maker’s market capitalization rose from $2.26 trillion on May 9 to a hefty $3.25 trillion just 30 trading days later. For context, Nvidia added more than the value of Berkshire Hathaway to its market value in six weeks. The company has grown by over $1.8 trillion (roughly the market value of Amazon) in 2024. The dominance of Nvidia and a few other mega-cap names has quelled hopes of a broader equity market rally. 

While the S&P 500 Index closed out a solid quarter up over 4% and has delivered strong year-to-date performance of over 15%, performance statistics from MSCI show that most other developed equity markets (including Japan, Hong Kong Canada, Germany, France and more) delivered negative performance for the quarter and have fallen even further behind year to date as the big got bigger.

We continue to view both concentration and valuation as concerning for U.S. equity investors. We believe the current size and future growth expectations of the top names set the bar exceedingly high even for the most stellar companies in the most transformative industries. In addition, while we have been highlighting the relatively low level of broad equity volatility for the better part of a year, we are also focusing on the high level of volatility present specifically in the market’s biggest names. The CBOE Volatility Index or VIX is a forward-looking view of volatility derived from 30-day S&P 500 options. The VIX closed the month at roughly 12.50% which is significantly under the longer-term average of about 16%. The same measure of implied volatility for Nvidia is roughly 4 times the VIX level, at over 50% according to Bloomberg. Certainly it makes sense for single name volatility to be higher than the market level; however, when one of the biggest companies in the world is trading with such high levels of volatility, this suggests to us that a bumpier ride may be in store for equity investor in the second half of 2024. 

Today’s equity market dynamics remind us that diversifying exposures across geographies, sectors, factors and individual companies are as important as ever for investors, and we remain committed to this foundational principle. This is particularly acute for passive investors who, at this stage of the cycle (concentrated and expensive), may want to begin diversifying into actively managed strategies. Speaking of actively managed strategies, as we embark on the third quarter of 2024, we continue to emphasize our preferred factors of value, quality, and momentum with a particular emphasis on value names and sectors. Value spreads—or the difference between cheap and expensive stocks—remain extremely wide and represent a compelling opportunity. From a sector lens, our value exposures tends to favor financials, energy and materials, our momentum exposure leans into Industrials, while our quality exposure tends to be concentrated in consumer staples.

Important information

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