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Innovative companies and small cap opportunity equities rallied in Q3 as markets responded positively to strong corporate earnings and a more accommodative Federal Reserve.
Equities posted strong gains in Q3, with the S&P 500 advancing 8.1% on a total return basis. After a July setback amid renewed inflation concerns, softer economic data in August and September reinforced expectations for easier policy, helping the index reach a record high on September 22 before easing slightly into quarter-end. Earnings continued to exceed forecasts, supported by resilient consumer spending and AI-related investment.
Market breadth improved modestly, though leadership remained concentrated in mega-cap technology. The equal-weighted S&P rose 4.35%, narrowing the performance gap. Ten of eleven GICS sectors gained, led by Technology (+13.0%), Communication Services (+11.8%), and Consumer Discretionary (+9.4%). Consumer Staples was the only decliner (-2.9%), pressured by weak pricing power and margin compression.
The U.S. dollar stabilized, gaining 0.9% for the quarter, a mild headwind for international returns. Europe’s Euro Stoxx 50 rose 4.3% (4.2% in USD), Japan’s Nikkei 225 surged 11.0% (8.3% in USD) on yen weakness and strong corporate results, while the UK’s FTSE 100 climbed 6.7% (4.7% in USD).
In terms of the Innovation fund positions, small value cap stocks, as measured by the Russell 2000 Value index rose 12.60% while the Innovation-centric NASDAQ index rose 11.43% during the period. The widely follow Ark Innovation Fund soared another 22.78% as retail investors continued to speculate.
In this environment, we favor innovative companies offering attractive growth prospects but trading at reasonable valuations. Some of our themes include the rapid adoption and deployment of artificial intelligence, cyber security, healthcare innovation and migration of electronic data to the cloud. Meanwhile, our small cap value selection process continues to find overlooked and underappreciated opportunities across several key market sectors.
The information contained in this article is for information purposes only, and represent the views of the author. It is not intended as specific investment or financial advice, or a recommendation or solicitation to buy or sell any security. Any investments or strategies listed in this article may not be suitable for all investors. Past performance is not indicative of future performance, and as with any investment, prices may fluctuate. It is recommended that advice is sought from a qualified investment professional prior to implementing any financial plan. LOM has made every effort to ensure that the contents herein have been compiled from sources believed reliable, however LOM does not warrant the accuracy, adequacy, timeliness, or completeness of this information expressly disclaims liability for errors or omissions in this information.
