We could characterize investor sentiment in 2023 and 2024 as “artificial intelligence at any price, downside risk is an afterthought.” That attitude, however, changed significantly in early 2025. Risk matters again. Accordingly, high-quality factors are back in favor as investors seek a safe haven amid heightened policy and economic uncertainty. In recent days, though, market movements have felt indiscriminate as volatility impacted all stocks somewhat proportionately, with little discernment between high-quality and low-quality stocks. This environment creates opportunities for high-conviction, long-term investment managers.
The chart below details a factor analysis illustrating the drivers of U.S. stock market performance in 2023 and 2024, corroborating our characterization of market sentiment in those years. Growth, momentum and volatility factors were rewarded while value and cash flow were given short shrift. The quality factors were mixed but overall tilted negative.
*Market Cap = Top 70% of U.S. Market. U.S. Factor Data Ending December 2024.
© 2024 Style Research Ltd. All rights reserved. All trademarks are the property of their respective owners.
For more information about each factor shown in the above graph, please review the disclosure section at the end of this article.
Fast forwarding to 2025, that picture changes dramatically. Value, cash flow and quality factors are now in favor while investors have shunned volatility, momentum and growth. The data in the chart below encompasses the first three months of 2025 and illustrates clear discernment among equity investors, perhaps highlighting the unwinding of “risk-on” trades made during the previous two years.
*Market Cap = Top 70% of U.S. Market. U.S. Factor Data Ending March 2025.
© 2025 Style Research Ltd. All rights reserved. All trademarks are the property of their respective owners.
For more information about each factor shown in the above graph, please review the disclosure section at the end of this article.
However, market fluctuations have been more correlated in April. A microcosm of this behavioral shift can be seen in the chart below, prepared by investment research firm Strategas, showing lockstep stock price declines on April 4 as market participants reacted to higher-than-expected tariff policy announcements.
Source: Strategas, Bloomberg Finance L.P., as of April 2025.
In our view, the trend toward interrelated stock price movements is being driven by unpredictable trade policy. As we know, uncertainty often leads to volatility in the stock market. It can also paralyze decision making among business leaders, leading to delays in investment outlays and threatening the prospects for future business value creation. The chart below, from the St. Louis Federal Reserve, illustrates the recent spike in policy uncertainty. The current reading is near levels observed in the early days of the COVID-19 outbreak.
Shaded area indicates U.S. recession.
Source: Baker, Scott R., Bloom, Nick and Davis, Stephen J., via FRED, Federal Reserve Bank of St. Louis; as of April 2025.
Looking forward, elevated uncertainty and market volatility seem likely to persist. This instability can be unsettling, but our experience managing quality strategies through past analogues reminds us that investor trepidation in the short term can lead to long-term opportunities. We believe our portfolios are well positioned to withstand turbulent markets. This offers us the flexibility to deploy capital opportunistically to help enhance the quality, growth and risk-adjusted return profile of our strategies.
In volatile markets, it pays to know what you own.
Past performance is no guarantee of future results. The information contained herein represents management’s current expectation of how Jensen’s investment strategies will continue to be operated in the near term; however, management’s plans and policies in this respect may change in the future. In particular, (i) policies and approaches to portfolio monitoring, risk management, and asset allocation may change in the future without notice and (ii) economic, market and other conditions could cause the strategy and accounts invested in the strategy to deviate from stated investment objectives, guidelines, and conclusions stated herein.
The information contained herein is current as of the date of this material and is subject to change at any time, based on market and other conditions.
Certain information contained in this material represents or is based upon forward-looking statements, which can be identified by the use of terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “target,” “project,” “estimate,” “intend,” “continue,” or “believe,” or the negatives thereof or other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events or results or the actual performance of a client account may differ materially from those reflected or contemplated in such forward-looking statements, on market and other conditions.
The Style Analytics chart represents a statistical sampling technique to evaluate different factors in the market under value, quality, growth, momentum, etc. Top 50% highest scoring companies (positive or negative) are being measured under each factor. 70% of the largest companies in the index are being scored under market cap factor only, so that mega caps do not skew the result. Sector adjustment is applied so that no one company or industry has an outsized influence, meaning the scores are neutralized to the actual sector weights in the U.S. market as measured by the MSCI USA Investable Market Index for the indicated period.
The MSCI USA Investable Market Index (IMI) is designed to measure the performance of the large-, mid-, and small-cap segments of the U.S. market. With 2,282 constituents, the index covers approximately 99% of the free-float-adjusted market capitalization in the United States.
Style Analytics, Inc., is the source for reports with the “Style Analytics” logo. Although taken from reliable sources, Jensen cannot guarantee the accuracy of the information received from third parties. Graphs, charts, and/or diagrams cannot, by themselves, be used to make investment decisions.
Jensen Investment Management, Inc., is an investment adviser registered under the Investment Advisers Act of 1940. Registration with the SEC does not imply any level of skill or training.
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