Summary
- Market Leadership: SMID Cap stocks rebounded sharply in Q3, with the Russell 2500 outperforming the S&P 500 by its widest margin since Q1 2021.
- Rotation & Style: Market leadership rotated broadly toward Value, with all sectors posting gains except Energy, which declined on lower oil prices.
- Performance Drivers: The SMID Cap Core Strategy outperformed, led by strong security selection in quality cyclical stocks across Technology, Industrials, Materials, and Energy.
- Policy Tailwind: Fed rate cuts supported valuations, particularly for quality cyclicals positioned for a potential soft landing.
- Earnings Outlook: While earnings growth has yet to accelerate and revisions remain negative, 2025 growth expectations exceed 20% after several flat years.
- Positioning: SMID Cap valuations remain attractive versus Large Cap; the portfolio continues to emphasize quality, trimming expensive positions and reallocating to higher-conviction holdings while managing recession risk.
Video Transcript
Hi, I am Brian Kute, Senior Portfolio Manager for the Johnson SMID Cap Core strategy.
In the third quarter, SMID Cap stocks bounced back, turning the tables on Large Cap, with the Russell 2500 Index beating the S&P 500 by its biggest margin since the first quarter of 2021.
It was a broad rotation in the market, as leadership shifted, most notably in favor of Value.
Aside from the Energy sector, which declined due to falling oil prices, every other sector delivered positive returns.
The SMID Cap Core portfolio outperformed, primarily from favorable security selection.
Many of the strategy’s top performers were “quality cyclicals” within the Technology, Industrials, Materials, and Energy sectors.
These types of stocks stand poised to benefit if we have an economic soft landing, and valuation improved with the Federal Reserve’s easier monetary policy.
While the rate cut has been a nice tailwind to valuation recently, sustained returns will likely require earnings growth to accelerate.
That has not happened yet and estimate revision trends have still been negative.
But next year’s earnings growth prospects look brighter – currently expecting a more than 20% increase after a couple of flattish years.
SMID Cap stocks still trade at a significant discount to Large Cap stocks, and a continued rotation would be favorable for performance.
Recent portfolio activity has stayed consistent with our portfolio discipline, such as actively reducing positions in more expensive Mid Cap stocks that are starting to outgrow the SMID Cap space.
Additionally, we remain vigilant for recession risk and sold positions with weakening quality profiles in favor of higher conviction stocks.
Maintaining quality remains at the heart of our strategy, and we are committed to preserving this characteristic in our portfolio, regardless of the economic outlook.
Thank you for your interest in our strategy.
Published 10/22/2024
Johnson Asset Management (JAM) is a division of Johnson Investment Counsel, Inc. (“JIC”), an independent and privately owned Midwestern based investment advisory firm registered with the Securities and Exchange Commission. Johnson Asset Management manages institutional separate account portfolios for a variety of for-profit and nonprofit organizations, public agencies, public and private retirement plans, and personal trusts of all sizes. It may also serve as sub-adviser for mutual funds. JIC’s fees are available upon request and may be found in our Form ADV Part 2A. Performance data quoted herein represents past performance. Past performance does not guarantee or indicate future results. All data is current as of September 30, 2024 unless otherwise noted. Returns and net asset value will fluctuate. To determine if this strategy is appropriate for you, carefully consider the investment objectives, risk factors, and expenses before investing. Individual account management and construction will vary depending on each client's investment needs and objectives. Investments employing JIC’s strategies are NOT insured by the FDIC or by any other Federal Government Agency, are NOT Bank deposits, are NOT guaranteed by any Bank or any Bank affiliate, and MAY lose value, including possible loss of principal. Johnson Asset Management claims compliance with the Global Investment Performance Standards. The Institutional Core composite includes all fee paying, fully discretionary, actively managed institutional fixed income portfolios with a minimum value of $500,000 and an investment objective of broad investment grade, taxable fixed income, benchmarked against the Bloomberg U.S. Aggregate Index. The US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar denominated, fixed-rate taxable bond market.
JAM’s policies for valuing portfolios, calculating performance and preparing compliant presentations, as well as a complete list of composite descriptions are available upon request. Please contact our office at 513.389.2770 or 3777 West Fork Road, Cincinnati, OH 45247. All returns reflect the reinvestment of investment income (dividends and/or interest) and capital gains. Valuations and returns are stated in U.S. dollars. Trade date accounting is used. Portfolio returns are calculated using time weighed return methodology on a monthly basis. Net returns shown reflect gross performance less the highest fee schedule for this strategy. Actual client returns would also be reduced by brokerage commissions, custodial fees, and other client paid expenses detailed in JIC’s Form ADV Part 2A.
