Month in the Markets: US and European shares’ six-month hot streak

The highly cyclical financials and energy sectors both posted losses. 

US shares managed to climb higher for the sixth month in a row in July, with the S&P 500 Index clocking a monthly gain of 2.4%. The Dow Jones also ended July in positive territory, rising by 1.3%. Things were less positive when it came to smaller-sized equities. While the S&P MidCap 400 posted a small gain of 0.35%, the S&P SmallCap 600 lost 2.1%.

Driving this performance was a return of economic growth and Covid-19 scares amid the spread of the Delta variant. As a result, more cyclical mid- and small-cap stocks fell out of favour, while the tech and growth stock-heavy S&P 500 index paced ahead.

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This could also be witnessed in the sector performance of US shares. The Information Technology sector recorded a gain of 3.9%, while Consumer Services (which includes many tech companies) rose by 3.6%. Meanwhile, the highly cyclical financial and energy sectors both posted losses. Energy was the worst hit, seeing a fall of more than 8%.

This dynamic was also evident in the performance of factor-based indices. The best-performing factor was growth, with the S&P 500 Growth Index rising by 3.8%. The S&P 500 Quality Index also outperformed, with a gain of 2.6%. Meanwhile, value stocks underperformed, with the S&P 500 Value Index gaining 0.8% and the S&P 500 Value Enhanced index falling by 1.4%. Value stocks have a lot of overlap with cyclical stocks.

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In Europe, the picture was similar. The S&P Europe 350 Index hit another all-time high in July and finished up by 1.78% on the month. This was also the index’s sixth consecutive month of gains. The S&P United Kingdom, however, was almost flat, with a gain of just 0.1%. Equities in Switzerland, France and the Netherlands were among the best performers, with the three markets contributing more than half of the S&P Europe 350’s returns.

However, unlike in the US, European mid and small caps outperformed in July. The S&P Europe MidCap index returned 3.9%, while the S&P Europe SmallCap returned 2.7%. In terms of sectors, S&P Europe 350 Information Technology was the clear leader, with a return of almost 6%. Energy was the biggest loser, with the European energy index posting a loss of over 3%.

In terms of global indices, the S&P Developed Market Index saw a return of almost 2%. However, the emerging market index, the S&P Emerging BMI, saw a loss of almost 5%. This was largely driven by the sell-off in Chinese equities, as Chinese shares now dominate emerging market indices. The S&P China Index declined by 9% in July. This was due predominately to continued concerns about the government’s regulatory crackdown on Chinese technology and education companies.