A little humility goes a long way

Two weeks ago, Federated Hermes' macroeconomic team adjusted their equity exposure in PRISM© balanced portfolios by selling large-cap growth and EAFE stocks while maintaining overweights in small-cap, value, and emerging-market equities. This decision stemmed from concerns that large-cap growth stocks had become overly reliant on momentum and required strong AI capex growth to sustain their performance.

Since then, a significant market rotation has occurred, with the Russell 2000 Index outperforming the Russell 1000 Growth Index by 17.9% and the Russell 1000 Value Index outperforming by 11.4%. Earnings updates have bolstered their strategy, as earnings season indicates positive trends with reported earnings exceeding forecasts.

Recent inflation data also supports a potential Federal Reserve rate-cut cycle, with lower-than-expected CPI readings. Additionally, political dynamics are shifting in favor of value and small-cap stocks.

Looking forward, despite potential volatility, the team remains committed to the rotation strategy and emphasizes the importance of humility in navigating both markets and politics.