At the Half: Taking Stock of Market Performance and Themes to Watch Ahead

Q2 2021 Market Performance

• S&P 500 gained approximately 15% in the first half of 2021, split evenly between Q1 and Q2.
• Euro equities advanced ~15% and the Nasdaq rose 12%, with the latter gains heavily concentrated in Q2.
• Japanese markets posted mid-single-digit gains for the period.
• Market volatility reset substantially, with the VIX index declining from 20 to 15.

Sector and Factor Rotation

• Aggressive sector rotation occurred despite headline index gains; energy stocks surged 46% year-to-date.
• Financials rose 25% year-to-date, contributing to a value-over-growth outperformance of roughly 30% for the year.
• This value-outperformance marks a significant reversal of previous years' trends, though growth staged a brief comeback in the last month of Q2.

Investor Positioning and Performance

• Long/short fundamental hedge funds reversed Q1 underperformance, now sitting at mid-single-digit year-to-date gains while covering shorts to increase net market exposure.
• Systematic quant funds delivered stellar returns of ~10% year-to-date and are gradually increasing their maximum length and exposure.
• Mutual funds achieved their best relative performance versus the index since 2009.
• Retail investors continue to act as a powerful force, actively allocating new capital to equities.

Forward-Looking Outlook and Economic Drivers

• Historical data indicates an 80% probability of a positive second half when the S&P rises >10% in the first half, with a median return of ~9%.
• The first two weeks of July historically represent the strongest two-week period of the year.
• Goldman Sachs research does not forecast a rate hike until Q3 2023, contingent on inflation spikes proving transitory rather than permanent.
• Despite a positive backdrop, a moderation in risk appetite is already observable.

European Market Dynamics

• Europe is experiencing its strongest capital inflows since 2015, with 10 weeks of consecutive inflows recorded in Q2.
• US investor ownership of European assets has doubled to approximately 30% compared to 2009 levels.
• European venture capital investment has doubled over the last three years, outpacing the pace of the US and Asia.
• The number of European unicorns increased from 20 to 120 in the same period, with tech funding rising sixfold.
• Analysts anticipate the end of the era of negative bond yields, removing a historical limiting factor for the region.

Capital Markets and M&A Activity

• Corporate activity is projected to remain buoyant in the second half driven by ample dry powder and shareholder confidence.
• SPAC issuance could drive nearly $1 trillion in M&A enterprise value over the next 24 months.
• Private equity firms hold approximately $1 trillion in dry capital available for deployment.
• The UK is witnessing a substantial rise in shareholder activism and public-to-private corporate transactions.
• Goldman Sachs attributes this environment to a combination of transforming industries, booming confidence, record equity valuations, and accessible financing.

ESG (Environmental, Social, and Governance) Trends

• ESG funds account for 30–40% of total fund inflows year-to-date despite comprising only 7% of total Assets Under Management (AUM).
• The seven largest monthly ESG fund flows have all occurred within the last seven months.
• ESG assets under management have grown from $190 billion two years ago to over $500 billion globally.
• Europe remains the largest contributor to ESG flows, representing ~50% of the total.
• Corporates face boardroom frustration due to the lack of a common ESG scorecard to define success.
• The Net Zero Asset Manager initiative now has 73 signatories managing $32 trillion, representing over one-third of global AUM.