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Markets continued to rally in Q3 across global and emerging market equities, with global equities gaining 6.4%, US equities rising 5.8%, and emerging markets jumping 8.7%. Global developed equities were buoyed by the Federal Reserve's 50 bps rate cut in September, resilient economic data, and a positive earnings outlook. Emerging markets were strongly impacted by the stimulus package announced by China, which led to a 25% surge in the CSI 300 over a five-session streak in September.

Interestingly, though, this was a continuation of the year-to-date rally in a different form. Utilities, Real Estate, and Financials were the top-performing sectors in Q3, while Information Technology and Communication Services were at the top of the leaderboard in the year's first half. This rotation hints at a healthier, more sustainable market advance.

This instalment of the WisdomTree Quarterly Equity Factor Review aims to shed some light on how equity factors behaved during this second quarter and how this may have impacted investors’ portfolios.

Performance in focus: A clear rotation of factors in Q3

In Q3, the MSCI World (+6.4%), the MSCI USA (+5.8%) and the MSCI Emerging markets (8.7%) performed strongly on the back of a resilient economy, positive earning news and supportive monetary policies. Like in Q2, Emerging Markets performed the strongest during the quarter following China’s stimulus package.

Factor performance also highlighted the rotation we mentioned above:

• High Dividend, Minimum Volatility and Small Cap posted the strongest return across developed markets in Q3.
• While Quality, Momentum and Growth suffered negative performance. A complete reversal from the first half of 2024.
• In emerging markets, Minimum Volatility posted the only outperformance.
• In that region, Growth suffered the most, followed by Value and Momentum.

Figure 1: Equity factor outperformance in Q3 2024 across regions

YTD factor performance: The picture remains unchanged

Despite the rotation in Q3, the overall picture for 2024 remains unchanged. Momentum remains the best-performing factor in global equities, followed by Quality and Growth. Value and Size remain the weakest ones.

In Emerging Markets, Momentum also posted the strongest performance this year up to the end of September. High Dividend and Minimum Volatility resist but are still posting negative returns.

Figure 2: Equity factor outperformance in 2024

Q3: The equity rotation is finally here

It is striking that the worst three performing sectors in Q3 were the best three sectors in the first half of the year. The rotation that we observed in factors is also evident in sectors, and this is a strong sign that the equity rally is gaining in breadth and, therefore, in health as well. It is worth noting that this is not just the case in performance; fundamentals also show such a broadening. Up to mid-2024, earnings growth in the S&P 500 was mostly driven by the Magnificent Seven. However, analyst expectations for the rest of the year and early 2025 indicated that earnings growth would be shared more evenly between the seven biggest stocks and the 493 going forward.

Figure 3: S&P 500 sector performance in 2024

The Magnificent Seven's (except for Tesla's) performance in Q3 was lacklustre. Alphabet posted the 468th-best performance in the S&P 500, Amazon the 440th, Microsoft the 439th, and Nvidia the 424th.

This resulted in the outperformance of most strategies that focus on diversification and tend to underweight mega caps. The S&P 500 equal weight index is a prime example of the effect of that diversification. It outperformed the S&P 500 by 9.2% over the last quarter.

Figure 4: Relative Performance of S&P 500 Equal Weighted vs S&P 500

Valuations increased across the board in Q3

In Q3 2024, developed markets became more expensive. Most factor portfolios also got more expensive, with Small Caps suffering the most significant jump. Only Momentum stocks saw their valuation drop slightly. Growth stocks valuation, especially in the US, remains significantly elevated at 34.7 Price to Earning ratio. In Emerging markets, value stocks and momentum stocks benefited from slightly cheaper valuations, but the other factors also got more expensive. Overall, value stocks remain very cheap, with an 8.1 P/E ratio in the US and 6.9 in Emerging Markets.

Figure 5: Historical evolution of Price to Earnings ratios of equity factors