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Smart Beta Compass

Investment Outlook

tempo di lettura 9 min

Moderating Inflation to Maintain Exceptionalism

This quarter we expect US large cap stocks to maintain a structural advantage in profitability and earnings growth. The positive outlook may be resilient to tighter monetary policy, since political tailwinds will support critical sectors. The new Republican majority Congress is prioritising an extension to the Tax Cuts and Jobs Act and a more favourable regulatory environment in technology and financials. The “America first” approach could help broaden performance into other cyclical sectors by supporting a robust employment outlook. The main risk facing investors would be higher inflation.

The result of the US election has made inflation a key concern in 2025. The returning Trump administration is expected to increase tariffs on global trade and decrease regulation on domestic business. As trade and domestic policies take shape, we should monitor the change in inflation expectations as a basis for investment opportunities.

Last quarter we expected the soft landing narrative to remain in focus as market participants anticipated lower interest rates. The balance between sustained growth and moderate inflation had been providing support for bullish sentiment in US equities. While inflation has moderating globally, yields actually increased in Q4. And the market failed to deliver a significant increase in volatility. We had encouraged investors to consider valuation, market concentration, and volatility when reviewing allocations. Investors’ risk appetite may now be driven more by the price volatility in consumer goods than the price of equities.

The Magnificent 7 stocks lead a significant advance in US growth stocks to close Q4. Investors remain overweight market beta and higher relative quality stocks. The December consumer price index (“CPI”) reported 2.9% (3.2% ex-Food & Energy). Nearly all of the increase in consumer prices is coming from the core services category (Figure 1). The contraction of prices in core goods, from 2.5% at the peak in Q1 2022 to less than zero today, has helped inflation moderate closer to the Fed’s long-term target (Figure 2). A reflation in prices of core goods would likely have a greater impact on indexes with a high exposure to consumer cyclical sectors (Figure 3). Investors should also consider historical risk when determining which index to add long exposure in US equities (Figure 4).

Inflation Moderation Core services account for nearly all of the recent increase in CPI. The contraction of prices in core goods has helped inflation moderate closer to Fed’s long-term target. Investors should monitor the impact of global tariffs and domestic policy to see inflation returns to consumer goods. If input costs can remain contained, the breadth of the trade can extend into small caps and value stocks.

Impact of Consumer Sensitivity on Returns Tariffs may increase prices on inputs to consumer goods. Domestic policy and deregulation could be more supportive of the US labour market. Supportive conditions would likely have a greater impact on indexes with a high exposure to consumer cyclical sectors.

Risk Tolerance is Important 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 continue to deliver a broadening of the US market rally. Quality offers an expensive, but relatively neutral risk exposure. Dividends provide investors with the lowest risk historical beta.

This quarter we expect the soft landing narrative will remain in focus as investors digest the impact of the return of President Trump. The US should continue to dominate investor positioning because of strong relative growth. The challenge for the incoming US administration will be to strike the appropriate balance between sustained growth and moderate inflation. While US equities remain attractive, investors must consider which specific exposure meets their risk tolerance and market outlook. We encourage investors to consider valuation, market concentration, and inflation expectations when reviewing allocations.

The size trade, buying US small caps, can provide investors exposure to a broadening in US exceptionalism. Valuations look attractive in core US small caps but a value-weighted strategy can be an even cheaper way to gain exposure to this theme. For investors unincumbered by market concentration and seeking to continue to own the hyper growth complex, we would suggest considering a Quality Aristocrats approach which provides an exposure to cash cows with a proven track record. Finally, for a risk-off approach to staying long US equities, Dividend Aristocrats offer a defensive opportunity to diversify away from market leadership into stocks which are historically under-owned.

SPDR ETFs have long offered a suite of exchange traded funds (ETFs) tracking the Dividend Aristocrats® family of indices. The Aristocrats approach has a unique focus on companies with a long-term track record of paying regular cash dividends in its stock selection. SPDR now offers a Quality Aristocrats strategy for a systematic approach to identifying high quality companies that have a long term track record of being most efficient at converting revenue into free cash flow.

Investors are encouraged to consider the following:

  • USA The US continues to strike a balance between sustained growth and moderate inflation. If the incoming Trump administration can implement its agenda without disrupting this balance, it should be a favourable environment for size and quality factor exposures. If not, dividend stocks are historically under-owned and offer a defensive diversified alternative.

How Can Investors Navigate This Theme?

USA: SPDR® S&P 500 Quality Aristocrats UCITS ETF (Acc)

The SPDR® S&P 500 Quality Aristocrats UCITS ETF seeks to fully replicate the S&P 500 Quality FCF Aristocrats Index, which is comprised of U.S. companies exhibiting higher quality characteristics in the S&P 500 Index. To be considered to exhibit higher quality characteristics, securities in the Parent Index must first satisfy the multiple consecutive years of positive free cash flow (“FCF”) criteria. Then, for the remaining securities, the top 100 securities with the highest “Quality Score” are selected as Index constituents.

USA: SPDR® Russell 2000 U.S. Small Cap UCITS ETF (Acc)

The SPDR® Russell 2000 U.S. Small Cap UCITS ETF seeks to fully replicate the Russell 2000® Index, which is a free float-adjusted, market capitalisation-weighted index of approximately 2000 securities, providing investors with a benchmark for smaller US companies. The Index covers approximately 8% of the total US equity market.

USA: SPDR® MSCI USA Small Cap Value Weighted UCITS ETF

The SPDR® MSCI USA Small Cap Value Weighted UCITS ETF seeks to fully replicate the MSCI USA Small Cap Value Weighted Index, which is designed to re-weight each security in the MSCI USA Small Cap Index to emphasise those stocks with lower valuations.

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.

Implementation Ideas:

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