EQUITY RISK MONITOR HIGHLIGHTS

• US risk ticks up as hot inflation data drags down equity market
• European Energy sector rises as tensions escalate in the Middle East
• WW Earnings Yield outperforms amid mixed earnings reports

US risk ticks up as hot inflation data drags down equity market 

Short-horizon risk ticked up as hot inflation data, declines in leading banks and increased geopolitical concerns pulled down US equities last week. The STOXX US Index fell 1.5% dragged down by all sectors, with Financials, Health Care and Industrial being responsible for two thirds of the US index weekly decline.  

No other region among the geographies covered by the Equity Risk Monitors saw such a steep increase in risk as the US over the past five business days. In fact, Japan, UK, and Emerging Markets’ risk continued to fall abruptly last week. 

Market and industry risk drove the rise in STOXX US index’s short-horizon risk, as measured by Axioma’s fundamental risk model. Specific risk also rose, but it has a relatively small impact on a benchmark. Despite the increases in these risk components, the total risk of the US market remained lower than January levels. While market risk and style risk have been both trending downward, industry and specific risk rose since the beginning the year. 

See graph from the STOXX US Equity Risk Monitor as of 12 April 2024: 

European Energy sector rises as tensions escalate in the Middle East 

The European Energy sector rose nearly 5% last week following the intensification of the conflict in the Middle East, which caused a surge in oil prices to highs that haven’t been observed in several months. Energy in the STOXX Europe 600 index was the best performer among the 11 GICS sectors over the past four weeks, recording a 14% gain during this period. Despite constituting just 6% of the European market, the Energy sector was the primary driver behind the monthly increase of the European index. 

Energy’s current weight in STOXX Europe 600 is on par with its level 12 months ago. Energy’ risk contribution to the benchmark, however, is smaller than what its weight would suggest and it is also smaller than the contribution level one year ago when the sector’s weight and risk contribution were about equal. 

See graph from the Europe Equity Risk Monitor as of 12 April 2024: 

WW Earnings Yield outperforms amid mixed earnings reports 

Earnings Yield continued to climb and kept its second-highest performer status (after Value) among all fundamental style factors in Axioma’s Worldwide fundamental medium-horizon model. Earnings Yield recorded a 12-month return of 4% last Friday. The three-, six-, and twelve-month returns of Earnings Yield in the Worldwide model were all nearly three standard deviations higher than the expectations at the beginning of each period. 

Earnings Yield also produced significant positive 12-month returns that exceeded two standard deviations in Europe, Asia Pacific ex-Japan, Japan, Developed Markets ex-US, and Emerging Markets Axioma medium-horizon models. Earnings Yield’s one-year return was negative only in the US Small Cap model.  

See graph from the STOXX Developed World Equity Risk Monitor as of 12 April 2024: