Biweekly Investment Insights: Relative Equity Performance Observations Heading into the Stretch Run

Yanni Angelakos, Head of Investment Insights, Nasdaq Capital Access Platforms

A Look at Select Relative Equity Universe Returns on a Tactical Basis

• After international outperformed U.S. equities by more than 3 standard deviations by the middle of 2025, the relative outperformance has continued to fade
• Drop in Treasury 10-year yields amidst increased Fed rate cut expectations helping the more rate-sensitive, domestically-geared U.S. equity pockets
• September has historically been the worst month for equities going back to 1950 

Summary

Following another strong Q2 earnings season and post the Jackson Hole Economic Policy Symposium, both U.S. and international equities are hovering near all-time highs driven by steady fundamentals. The headlines searched for a culprit to fill the space amidst the recent steadying of the U.S. equity rally—e.g., stretched valuations (they’ve been stretched for some time), profit taking (there is always profit taking), concerns around slowing U.S. economic activity (a lingering concern though, interestingly, the Citi U.S. Economic Surprise Index is at its highest since December 2024). The markets took Federal Reserve Chair Jay Powell’s speech on August 22nd at Jackson Hole as all but solidifying a 25 basis point rate cut at the next FOMC meeting on September 17th. As the dust has settled following Powell’s speech, the broadly in-line July CPI report, and the weaker July nonfarm payrolls, markets are pricing in around a 90% chance of a Fed rate cut. What would it take for a 50 basis point cut to be in play? Likely not just another weak jobs report on September 5th as job growth has been trending lower already, but a negative net monthly number coupled with softer inflation readings prior to the meeting. On the flipside, while the tea leaves point to a cut in September, 1) there are still important data points between now and then, and 2) markets have to be careful about “wishing” for softer employment data under the auspice that a more aggressive Fed will spur risk assets further; bad news can be good news for risk-taking up to a point, after which bad news just becomes, well, bad news.   

To grossly oversimplify it, markets rally until they don’t. We are not in the business of calling near-term tops or bottoms. But where we hope we can add value is by keeping investors and their clients informed of the latest trends—both the tailwinds as well as the headwinds—and to provide relevant insights. As such, what follows are charts of selected relative performance trends across international versus U.S. equities and lower interest rate U.S. beneficiaries which have caught our attention recently. These are admittedly being viewed in a vacuum as they focus purely on relative performance trends and are not layering in fundamental theses. Yet keeping the price action and technical factors in mind can be informative as part of a holistic investment process.

Biweekly Chart in Focus: Revisiting International versus U.S. Equity Performance

Source: Bloomberg. Notes: weekly intervals, as of August 22, 2025

Details

“Sell America” Equity Trade Continues to Fade

In our June 6th report, we noted how international equities had outperformed U.S. equities by more than 3 standard deviations versus the historical average of the prior 10 years—an updated chart is above. As it relates to the above chart, when the Nasdaq Global ex-United States™ Index (NQGXUS™) has outperformed the Nasdaq U.S. Benchmark™ Index (NQUSB™) by more than 3 standard deviations over a six month rolling time frame, international equities have not historically outperformed U.S. equities in the ensuing six months over the last 10 years.  

For a thematic comparison, Figure 2 below shows the Nasdaq Golden Dragon China^TM Index, consisting of mainly Chinese ADRs which are mostly technology-geared equities, relative to the Nasdaq-100 Index® (NDX®). Despite outperformance by this Chinese versus U.S. tech proxy pair during most of this year, it still “feels” as if this would be a contrarian trade given the well-known AI trends within the U.S. mega cap tech space. Similarly, when the Golden Dragon China Index has outperformed by more than 2 standard deviations, it has not historically outperformed the Nasdaq-100 over the next six months during the past 10 years. Here, too, we see this trend continuing as, although the broader-based MSCI China Index is at its highest since January 2022, these Chinese ADRs are underperforming U.S. mega cap tech by nearly 10% over the past six months. This comes after they peaked on a relative basis following the DeepSeek news earlier this year and a broader run up in Chinese tech names.  

Figure 2: Chinese Tech vs. U.S. Tech

Source: Bloomberg. Notes: weekly intervals, as of August 22, 2025

Zooming out and using ETFs as the tradeable proxies, Figure 3 shows EEM (iShares MSCI Emerging Markets ETF) relative to Invesco’s QQQ which tracks the Nasdaq-100. As we discussed in our August 4th piece, a key underpinning for EM assets this year has been the ongoing USD weakness. While the trade-weighted USD index (DXY) has not materially appreciated from its early July lows, it has not further weakened materially either; point-to-point, it is basically flat over the past six weeks. In the very near-term, markets are digesting the implications of the political pressures on the Fed and the potential impact on U.S. assets. Over the medium-term, a broadly weaker USD can remain a tailwind for EM assets which can still help EEM outperform, but just not by as much absent another bout of notable weakness—Bloomberg estimates have the EURUSD cross at 1.22 by the end of 2026, a nearly 5% USD decline. Consistent with the prior two international versus U.S. relative performance charts, over the past 10 years when EEM has outperformed QQQ by more than 1 standard deviation, it has only outperformed 5.2% of the time over the next six months during which it has underperformed on average by -11.1%.

Figure 3: EM Equities vs. QQQ

Source: Bloomberg. Notes: weekly intervals, as of August 22, 2025

For both institutional and retail investors investing globally, timing such tactical relative trades is extremely difficult. Consequently, it is about monitoring exposures across geographies and identifying potential dislocations in markets which can lead to opportunistic asset allocations.  
We will not delve into the details of the fundamental tailwinds for U.S. equities as we have discussed these over the past few months. We will just note that from a bottoms-up perspective, U.S. companies: are the drivers of the AI revolution, are some of the highest quality based on measures such as ROTIC (return on tangible invested capital) and ROE (return on equity), and have very strong earnings characteristics. And from a macro perspective, despite the ongoing trade, economic, and fiscal policy uncertainties emanating out of the U.S.: the U.S. economy remains resilient given its dynamism—particularly relative to other economies; it is a more favorable regulatory environment; and, U.S. indexes benefit from having some of the most innovative companies in the world.   
Again, there is certainly room for international equities to close the gap given U.S. equities’ massive outperformance since the financial crisis—e.g., NQUSB has outperformed NQGXUS by nearly 280% since the end of 2012—particularly given the large valuation discounts and the scope for idiosyncratic opportunities outside of the U.S. in light of the shifting global construct. However, from a top-down index perspective, it will either require international equities to grow and innovate similar to their U.S. counterparts, or U.S. companies’ innovative and product dominance to begin to fade, and the U.S. economy to falter relative to other economies. These are among the scenarios which investors need to bet on for international to outperform U.S. equities on a sustainable basis. 

U.S. Equity Areas Benefiting from Lower Rates 

Focusing on two of the more rate sensitive U.S. equity universes—homebuilders and small caps—they began to reverse from their nadir of relative underperformance versus the S&P 500 following the peak in Treasury 10-year yields at the end of May 2025 when they were in the 4.60% vicinity. The housing market and homebuilders benefit from a lower 10-year yield which drives the directionality of mortgage rates. And lower Treasury yields and Fed rates can spur U.S. economic activity which benefits the earnings prospects of the more domestically-geared small cap space, particularly as 45% of Russell 2000 stocks are unprofitable versus 5% of the S&P 500 (per BlackRock, as of June 2025). Additionally, on average, small caps have more floating rate debt than large caps (approximately 40% of Russell 2000 debt (excluding financials) compared to less than 10% for the S&P 500, per J.P. Morgan Asset Management)—so lower rates can benefit small caps more by lowering their cost of capital.    
These benefits for homebuilders and small caps have helped boost investor sentiment recently. During the past 10 years, XHB (SPDR homebuilders ETF) has outperformed SPY (SPDR S&P 500 ETF) 73% of the time in the six months after it sells off by more than -1 standard deviation and 100% of the time when it hit -2 standard deviations on a relative basis, which it touched at the end of May—see Figure 4 below. IWM (iShares Russell 2000 ETF) is also positive on a go forward basis but not as strong as it has outperformed IVV (iShares S&P 500 ETF) nearly 63% of the time during the ensuing six months—refer to Figure 5 below.

Figure 4: Homebuilders’ Relative Performance Has Bounced from -2 Standard Deviations   

Source: Bloomberg. Notes: weekly intervals, as of August 22, 2025

Figure 5: U.S. Small Caps Have Bounced from -1 Standard Deviation    

Source: Bloomberg. Notes: weekly intervals, as of August 22, 2025

Layering in an international perspective, the table in Figure 6 shows the sensitivity to monthly changes in regional equities and sectors, and Treasury 10 yields (as the global risk-free rate proxy). The greener the cells, the more positive the correlation between monthly changes in equities and Treasury 10-year yields; the closer to red, the monthly changes are more inversely related. As one would expect, the more defensive areas and equity bond proxies tend to be the least positive or are negatively correlated (consumer staples, healthcare, real estate, and utilities). The more cyclical areas tend to have the higher correlations (consumer discretionary, energy, financials, industrials, tech, and materials)—particularly in Europe and Japan whose economies tend to be more cyclically-geared and export-reliant, which is evident in the benchmark equity indexes’ higher sensitivity to Treasury 10-year yields. 

Figure 6: Global Sector Sensitivity to Changes in Treasury 10 Year Yields 

Source: Bloomberg. Notes: Data as of January 1995. MSCI Europe data begins in 1999. S&P 500 Real Estate index begins in October 2001. MSCI Europe, Ja0070an, EM real estate indexes begin in August 2016.

Seasonals are Historically a Headwind for Global Equities in September  

While the drivers are debatable, on average, September has historically been the weakest month of the year for global equities (Figure 7) and particularly for U.S. equities since 2015 (Figure 8). The reasoning can range from mutual fund activity and tax-loss harvesting for funds whose fiscal year ends in September, to end-of-quarter dynamics (e.g., portfolio rebalancing, profit-taking), and even to the notion of post-summer investor behavior. We appreciate that seasonality can be spurious and tends to be convenient when fitting a particular narrative. That said, it is still worth being aware of the outliers.

Figure 7: Average Historical Monthly Returns for Global Equities

Source: FactSet. Note: in local currency terms

Figure 8: Average Monthly Returns for Global Equities Since 2015

Source: FactSet. Note: in local currency terms

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