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Equity Risk Monitors — September 25, 2023

Equity Risk Monitor Highlights | Week Ended September 22, 2023

  • Magnificent 7 stocks weigh on US market
  • Despite an uptick in risk, low volatility environment persists
  • Industrials and Materials put pressure on China’s market

Magnificent 7 stocks weigh heavily on US market

While most equity markets fell last week, and even though more than 500 of the 600 stocks in STOXX US were down, the US market was heavily weighed down by the decline of the “Magnificent 7” stocks: Amazon, Apple, Google, Meta, Microsoft, Nvidia and Tesla. With an aggregate weight of 27% in the STOXX US index, these stocks were responsible for more than a third of the US index’ weekly loss of 4%. The STOXX US Index’s five-day loss was higher than expected, nearly two standard deviations away from the expectation at the beginning of the week, as measured by Axioma’s US4 fundamental short-horizon model.

Of course, the dominance of the Magnificent 7 on the US market has been felt not only when their fortunes turned. The seven stocks’ stellar performance has lifted the US market in 2023, contributing 74% to the 14% year-to-date return of the STOXX US Index. In fact, without these 7 stocks, the US index would have recorded a 5% year-to-date return, underperforming most major markets.

The chart below does not appear in our Equity Risk Monitors, but can be provided upon request:

See graph from the STOXX World US Equity Risk Monitor of 22 September 2023:

Despite an uptick in risk, low volatility environment persists

Equity markets around the globe have witnessed a substantial decrease in risk since the beginning of the year, despite concerns about a global economic slowdown, uncertainty regarding major central banks’ decisions on interest rates, and an inflamed geopolitical environment. Although it ticked up last week,  current risk is below the five-year median risk level for all regions tracked by the Equity Risk Monitors, except Canada and Asia-Pacific ex-Japan, as measured by each of Axioma’s fundamental short-horizon local models.

The lowest level of short-horizon risk at the end of last week (about 11%) was recorded in Europe. Despite also seeing a decline in risk this year, Asia Pacific ex-Japan has become the riskiest region (at 16%) followed by China. Developed Markets and the US have seen the largest drops in risk year to date, of over 44%. Interestingly, risk in Japan—the best-performing region so far in 2023—is now at a similar level as it was at the end of December, after oscillating widely throughout the year.

This low volatility environment may have lured investors into a false sense of security and it may be ripe for a sharp market correction, as discussed by Melissa Brown and Olivier d’Assier in the blog post 10 market concerns masked by low volatility.

See graph from the STOXX Developed World Equity Risk Monitor of 22 September 2023:

Industrials and Materials put pressure on China’s market

As global growth slowed down, Industrials and Materials dragged down the STOXX China A 900 market. Materials and Industrials together account for more than a quarter of the Chinese index, and incurred the largest and third largest 12-month losses, respectively. Therefore, the two sectors’ current weights in the index are much lower than one year ago, but so are their contributions to the index risk. Nonetheless, Materials’ contribution to benchmark risk is higher than its weight would otherwise suggest.

Interestingly, while the Information Technology sector had a positive contribution to the US market return, it had a negative contribution to the Chinese market return over the past twelve months. Chinese Information Technology, Materials and Industrials have been the largest detractors over this period, turning the Chinese market into the second biggest loser after Asia Pacific ex-Japan year to date.

See graphs from the China Equity Risk Monitor as of 22 September 2023: