The S&P 500 remains within range of its recent highs as the economy continues to expand, corporate profits remain strong, and recession risk remains limited. However, there remain price-based risks to forward equity market returns. Below, we visualize the macro factor decomposition of equity market returns into returns from growth, inflation, policy, and the equity risk premium:
As we can see above, growth continues to support equity prices in a manner consistent with the economic expansion. Our inflation factor has shown much more mixed readings, with inflation hurting equities at the onset of the war, only to turn highly supportive in recent months. (Recall, equities are disinflationary assets, i.e., lower inflation is more supportive in the visual). Policy continues to be a drag on equities as monetary policy expectations of a hiking cycle continue to weigh on markets. Finally, the equity risk premium is the dominant driver of returns today. While the equity risk premium should indeed be a positive contributor to price returns over time, it is rarely a driver that can persistently rise at an accelerating pace as it is today. This opens the window for chop and potential downside in equities. In this note, we detail how our S&P 500 Program is approaching this dynamic.
The Prometheus S&P 500 Program aims to outperform the S&P 500 over a full investment cycle. The program will strive to achieve this objective by leveraging a combination of Sector Selection, Beta Timing, Active Overlays, and Dynamic Risk Control. Our S&P 500 Program can be integrated with our Crisis Protection Program, which seeks to offer a portfolio diversifier during periods of economic and financial instability by blending active, long-only exposure to Gold, TIPS, and VIX.
For context, we visualize the live returns for our Integrated Program below:
Our programs are operating in line with their long-term expectations. Today, the S&P 500 Program is positioned as follows:
