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        Smart Beta Compass

        Q2 Investment Outlook

        5 min read

        Q2 Market Outlook: Uncertainty Returns

        This quarter we expect investors to continue to seek shelter from the fallout of President Trump’s tariff-fuelled trade war. Investors should consider defensive stock exposures, especially in US equity allocations, to weather the elevated market-volatility storm. There are non-market-cap approaches to help investors de-risk their portfolio: dividends and low volatility. Both exposures significantly outperformed the market in Q1 and historically have provided strong relative performance in down markets.

        We observed a significant decline in sentiment in Q1, specifically in overcrowded trades which had been the source of market leadership — US over Europe, Growth over Value. The micro story remains intact — US growth stocks maintain a structural advantage in profitability and earnings growth — but the macro impact from trade policy has forced a re-evaluation of earnings multiples. The combination of multiple contraction and an overall de-risking environment has forced investors to pare back on long-held overweight holdings in US quality growth stocks.

        In our Q1 outlook, we feared that investor’s main risk would be higher inflation. This underestimated the scope and magnitude of the potential changes in US trade policy. The tariffs announced by the Trump administration are more rigid than the market had expected, and they apply to a broader range of countries. As a result, the potential impact of tariffs is not a merely a modest increase in consumer prices, but a full-blown disruption in global trade. The main risk is no longer inflation — it is recession.

        Implementing any new trade barrier can introduce uncertainty to global trading. The specific impact of the Trump administration’s tariff policy has been a source of increased volatility since the President’s inauguration in January. That uncertainty increased following the Liberation Day policy announcements and a subsequent 90-day pause for negotiations. Producers and consumers alike are struggling to understand what policy will be implemented.

        This uncertainty has forced market participants to revise growth expectations lower and recession fears higher (Figure 1).

        Investors looking to de-risk their portfolios should consider the sector diversification and historical defensiveness offered by dividend and low volatility indices in times of heightened uncertainty.

        Sector diversification: Dividend Aristocrats and Low Volatility index exposures take a relatively unconstrained approach, which can result in defensive sector overweights. Quality Aristocrats maintain a strong technology exposure, but through companies with high free cash flow and return on invested capital. Mid caps are concentrated in pro-cyclical sectors with more attractive valuations (Figure 2).

        Historical defensiveness. Investors should consider historical risk when determining which index to add long exposure in US equities. Size trades offer a high beta return at attractive valuations if the market can recover from the Q1 retreat. Quality offers an expensive but relatively neutral risk exposure. Dividends and Low Volatility provide investors with the lowest risk historical beta (Figures 3 and 4).

        Investors tended to view the balance between sustained growth and moderate inflation as a justification for holding a significant overweight in US equities coming into 2025. At the turn of the year, we had encouraged investors to consider valuation, market concentration, and volatility when reviewing allocations. This relative caution was justified by increased volatility in Q1.

        We expect the trade war narrative will remain in focus this quarter as investors continue to battle the headwind of uncertainty. US equities may struggle to return to market leadership until the focus of US policy shifts from global trade to the domestic agenda (e.g., tax cuts and deregulation).

        How Can Investors Navigate Market Uncertainty?

        SPDR® ETFs have long offered funds that track the Dividend Aristocrats,® uniquely focused on companies with a long-term track record of paying regular cash dividends, and Low Volatility index strategies that help investors seeking long equity positions with lower historical risk.

        USA: SPDR® S&P® U.S. Dividend Aristocrats UCITS ETF (Dist)

        The SPDR® S&P® U.S. Dividend Aristocrats UCITS ETF seeks to fully replicate the S&P High Yield Dividend Aristocrats® Index, which is comprised of stocks in the S&P Composite 1500® Index that have increased dividends for at least 20 consecutive years. These stocks have both capital growth and dividend income characteristics, as opposed to stocks that are pure yield, or pure capital orientated.

        USA: SPDR® S&P® 500 Low Volatility UCITS ETF (Acc)

        The SPDR® S&P® 500 Low Volatility UCITS ETF seeks to fully replicate the S&P 500 Low Volatility Index, which is comprised of the 100 least volatile stocks within the S&P 500 Index. The index employs a volatility-driven selection and weighting scheme. Volatility is measured by the standard deviation of a security's daily price returns over the prior 252 trading days.

        Eurozone: SPDR® S&P® Euro Dividend Aristocrats UCITS ETF (Dist)

        The SPDR® S&P® Euro Dividend Aristocrats UCITS ETF seeks to fully replicate the S&P Euro High Yield Dividend Aristocrats® Index, which is comprised of the 40 highest dividend-yielding Eurozone companies within the S&P Europe Broad Market Index (BMI), as determined in accordance with the Index methodology, that have followed a managed dividends policy of increasing or stable dividends for at least 10 consecutive years.

        Eurozone: SPDR® EURO STOXX Low Volatility UCITS ETF (Acc)

        The SPDR® S&P® 500 Low Volatility UCITS ETF seeks to fully replicate the S&P 500 Low Volatility Index, which is comprised of the lowest volatility companies from the parent index, the EURO STOXX Index. The EURO STOXX Index is a broad benchmark index representing large, mid and small capitalisation companies of 12 Eurozone countries: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain.

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