Equities in Focus
Thoughts from our Equity Experts
March 26, 2025
LATEST COMMENTARY
Defensive Shifts Are Not Always Dire
Amid the continued turbulence in US stocks, the market has broadened, and a significant style reversal has occurred. But the pivot from growth stocks to value equities has had it nuances, and not all is lost for patient investors in periods of high uncertainty.
Key Takeaways
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When Value Plays Defense
Value indices have benefited from heavier weights in sectors such as healthcare and consumer staples. -
Policy Uncertainty Unnerves Markets
Indeed, policy uncertainty has risen sharply, but we have been here before. -
Patience Is an Ally
Following peaks in US policy uncertainty, subsequent market returns have been rewarding.
A Closer Look at the Value Rally
This year’s value rotation has been more defensive in nature versus a classic, pro-cyclical variety. This owes in large part to the sector composition differences between the style indices (Display 1). Sectors such as healthcare, consumer staples and utilities are traditionally safer harbors when fears about the economy or the state of equity markets are in question, and they have larger weights in the value index.
A Surge Higher in Policy Fears
The culprit for the recent market pullback has been heightened US policy concerns ranging from government cost cuts to tariffs. This has been reflected in the US Economic Policy Uncertainty Index, which is sourced from US newspapers based on the number of articles containing terms such as “economic,” “uncertainty,” “legislation,” etc. Despite this year’s sharp rise in the Index (its peak was 496 in January), it has been higher in years past (Display 2). So, what has happened historically when the clouds begin to dissipate around policy uncertainty? Investors who stayed the course in prior scary times were ultimately rewarded over both near and longer time periods (Display 3).
Our View
Considering that we remain in the soft landing camp regarding the economy, investor sentiment is well off the highs reached late last year, and our expectation is for positive earnings growth in 2025, we expect equities will again get a boost should clarity emerge on the policy front. Also, we anticipate that diversification in equities will remain an investor’s friend, unlike the past two years. Lower volatility stocks with steady cash flows and dividend growers are examples of more ways to win beyond large-cap growth companies in these confusing times.
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