Improving Breadth Supports Solid Q2

Q2 Investor Letter

Equity markets advanced smartly during the Q2, rising 8% versus a 6% Q1 gain. The S&P 500 Index closed the quarter at 4,286, rising 14% YTD and up 40% from June 30, 2020. Stronger-than-expected earnings coupled with a benign rate environment powered the gain.

Indeed, consensus estimates for S&P 500 operating earnings have crept steadily higher, from $165 at the beginning of the year to $195 today. At the same time, rates have moderated, with 10-year treasury yields falling to 1.46%, declining 27 basis points for the quarter, a downward trend that has continued in the Q3 to date.

Sector performance during the quarter reflected a more equivocal view on the sustainability of strong economic growth following breakout GDP figures through the 1H. Industrials, financials and materials sectors underperformed the market during the Q2 while technology, a Q1 laggard, handily beat market averages, rising 11% for the period. Growth stocks, which underperformed value by over 2000 basis points in the Q1, roared back in the Q2, advancing 11.7%.

RAM portfolios remain overweight technology. We view accelerating digital transformation as a long-term growth driver benefitting multiple segments in this sector. Mass adoption of WFH (work-from-home) across multiple industries has demonstrated that mobility, connectivity, SaaS*, security and other solutions can help enable sustained strong business activity even in the face of unprecedented disruption and dislocation. Many of our companies tell us that the pandemic has accelerated adoption by 3-5 years.

That said, we are committed to balanced exposure. Our overweight position in healthcare, an industry that marries attractive growth with defensive characteristics and our nearly 20% position in high-quality energy, financial and industrial companies provides ballast to mitigate the inevitable downdrafts associated with either sector rotation or faltering long-term conviction.

While market performance for the 1H was the best in nearly 30 years, we remain bullish, believing that earnings growth - driven by both top line gains and margin expansion - will continue to surprise. Following 35 years of deflation, pricing power is back with profoundly positive implications for margin expansion across virtually all segments of the economy. Our early read on Q2 earnings reports supports this perspective. We see the S&P 500 Index trading up to 4900 over the next 12-18 months, representing 14% upside from the Q2 close.

As always, we are deeply grateful for your trust and confidence. If we can provide additional detail, clarify or elaborate in any way, please be in touch.

*Software-as-a-service or "SaaS" companies offer software on a subscription basis rather than relying upon one-time license fees. This business model approach offers the stability and enhanced predictability of recurring revenues.