Volatility eased and stocks climbed higher during the second quarter as the economy remained resilient in the face of sticky inflation and higher interest rates. Investors exhaled a sigh of relief as the debt ceiling was suspended following weeks of political handwringing that threatened to derail the economy. A rally in the artificial intelligence (AI) and large cap information technology stocks helped carry the market to its third consecutive positive quarter. The S&P 500® Index has now gained 25.97% since the market bottom on October 12, 2022 and sits just below its record high set early last year. 

The Federal Reserve (the Fed) brought some welcome relief to borrowers by pausing its aggressive interest rate hikes following 10 consecutive rate increases. Still, while inflation has eased from its peak, it remains well above the Fed’s 2% target and the Fed continues to signal a “higher for longer” rate environment with more hikes potentially on the horizon. The Consumer Price Index fell to 4.1% in May, marking the smallest year-over-year increase in more than two years. While energy prices have moderated, the Core CPI Index (excluding food and energy) remained stuck above 5% and inflation concerns have shifted to stickier wage and rent pressures.

Amid this backdrop, the economy continues to defy expectations of an impending recession as the job market and consumer spending remain strong. The U.S. economy expanded at a 2.0% annualized pace according to the Commerce Department’s report on first quarter GDP growth.¹ A pickup in consumer spending on durable goods and household expenditures, increases in state and federal government spending, and rising exports contributed a significant portion of the improvement. Signs of a slowdown in hiring were also hard to find as the economy added an average of 244,000 new jobs each month during the quarter and the unemployment rate sat near a multi-decade low of 3.6% in June.² The ISM PMI Index readings continued to show mixed signals with the manufacturing index remaining below 50 throughout the quarter, while the non-manufacturing sector remained above 50 (readings above 50 indicate economic expansion and below 50 indicate economic contraction).³

The S&P 500 rose 8.74% during the second quarter driven by a strong contribution from the information technology sector. Equity market gains came amid declining corporate earnings, which are expected to shrink -6.8% in the second quarter according to FactSet estimates. While nine out of eleven sectors were positive, market leadership was relatively narrow with five individual stocks (Apple, Microsoft, NVIDIA, Amazon, and Meta Platforms) contributing more than half of the total return. The information technology sector surged 17.23%, followed by gains of 14.58% and 13.06% for consumer discretionary and communication services, respectively. Utilities underperformed with a -2.53% return, followed by a -0.89% decline in the energy sector. The strength in information technology drove outperformance of Growth stocks over Value stocks as the Russell 1000® Growth Index rose 12.81% compared to a more modest 4.08% gain for the Russell 1000® Value Index. Large caps outpaced small caps, with an 8.58% return for the Russell 1000® Index compared to the 5.21% return for the Russell 2000® Index. Outside the U.S., foreign developed markets were led by strength in Italy, Japan, and Spain as the MSCI EAFE Index gained 2.95%. Meanwhile, shares in China sank -9.7% amid a stalled post-COVID recovery, creating headwinds for the MSCI Emerging Markets Index which registered a barely positive 0.90% return for the quarter. 

The bond market recovery stalled amid rising rates and expectations for further Fed policy tightening as the Bloomberg Barclays U.S. Aggregate Index sank -0.84% during the quarter. The 10 Year U.S. Treasury yield increased 33 bps to end the quarter yielding 3.81%. Yields climbed significantly higher for shorter maturities leading to a deeper inversion of the yield curve. Corporate bonds outperformed treasuries as both investment grade and high yield credit spreads tightened during the quarter. The Bloomberg Corporate Bond Index returned -0.29% while the Bloomberg Corporate High Yield Index produced a gain of 1.75%. Agency mortgage bonds were weaker with the Bloomberg U.S. MBS Index losing -0.64%. Meanwhile, municipal bonds were nearly flat with a -0.10% return for the Bloomberg Municipal Bond Index. Non-U.S. bonds underperformed as the Bloomberg Global Aggregate ex US Index lost -2.16%.

Each of us at AMG Funds appreciates the continued opportunity to assist you with your investing needs.

¹ U.S. Bureau of Economic Analysis, FactSet

² U.S. Department of Labor

³ ISM, FactSet

All investments are subject to risk including possible loss of principal. Past performance is no guarantee of future results.

Please note that all performance data and comments are for the period from July 1, 2022, through September 30, 2022. Any sectors, industries, or securities discussed should not be perceived as investment recommendations. The views expressed represent the opinions of AMG Funds and are not intended as a forecast or guarantee of future results.

The information and opinions contained herein are current as of September 30, 2022, and are subject to change without notice. Information has been obtained from sources believed to be reliable, but its accuracy, completeness, and interpretation are not guaranteed.

The Russell 1000® Index measures the performance of approximately 1,000 of the largest securities based on a combination of their market cap and current index membership. The Russell 1000® represents approximately 92% of the U.S. market.

The Russell 1000® Value Index is a large-cap value index measuring the performance of the largest 1,000 U.S. incorporated companies with lower price-to-book ratios and lower forecasted growth values.

The Russell 1000® Growth Index is a market capitalization weighted index that measures the performance of those Russell 1000® companies with higher price-to-book ratios and higher forecasted growth values.

The Russell 2000® Index is composed of the 2000 smallest stocks in the Russell 3000® Index and is widely regarded in the industry as the premier measure of small-cap stock performance.

The Russell 2000® Value Index is an unmanaged, market-value weighted, value-oriented index comprised of small stocks that have relatively low price-to-book ratios and lower forecasted growth values.

The Russell 2000® Growth Index measures the performance of the Russell 2000® companies with higher price-to-book ratios and higher forecasted growth values.

The Russell Midcap® Index measures the performance of the 800 smallest companies in the Russell 1000® Index, which represent approximately 25% of the total market capitalization of the Russell 1000® Index.

The S&P 500 Index is a capitalization-weighted index of 500 stocks. The S&P 500 Index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

U.S. Long Government Bond Index tracks the market for U.S. dollar denominated, fixed-rate, nominal U.S. Treasuries, and U.S. agency debentures.

The MSCI World ex USA Index captures large and mid cap representation across 22 of 23 Developed Markets (DM) countries excluding the United States.

The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. & Canada. Please go to msci.com for most current list of countries represented by the index.

The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets.

The MSCI China Index captures large and mid cap representation across China A shares, H shares, B shares, Red chips, P chips, and foreign listings (e.g. ADRs).

Please go to msci.com for the most current list of countries represented by the MSCI indices.

The Bloomberg Global Aggregate ex USD Index is a measure of investment grade debt from 24 local currency markets. This multi-currency benchmark includes treasury, government-related, corporate, and securitized fixed-rate bonds from both developed and emerging markets issuers. Bonds issued in USD are excluded.

The Bloomberg U.S. Corporate High Yield Bond Index is a total return performance benchmark for USD-denominated, high yield, fixed-rate corporate bonds having a maximum quality rating of Ba1/BB+/BB+ or below, as determined by the middle of the Moody’s, Fitch, and S&P ratings.

The Bloomberg U.S. Municipal Index covers the USD-denominated long-term tax exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds, and prerefunded bonds.

The Bloomberg U.S. Aggregate Bond Index is an index of the U.S. investment grade fixed-rate bond market, including both government and corporate bonds.

The Bloomberg U.S. Corporate Bond Index is an unmanaged index representative of publicly issued, SEC-registered U.S. corporate and specified foreign debentures and secured notes.

Bloomberg®” and any Bloomberg index described herein are service marks of Bloomberg Finance L.P. and its affiliates, including Bloomberg Index Services Limited (“BISL”), the administrator of the index (collectively, “Bloomberg”) and have been licensed for use for certain purposes by AMG Funds LLC. Bloomberg is not affiliated with AMG Funds LLC, and Bloomberg does not approve, endorse, review, or recommend the fund described herein. Bloomberg does not guarantee the timeliness, accurateness, or completeness of any data or information relating to such fund.

The Indices are unmanaged, are not available for investment, and do not incur expenses.

Investment advisory services are offered by AMG Funds LLC. AMG Distributors, Inc., member FINRA/SIPC.