Topic Tags: U.S. Equity

Brains Over Brawn?

The development of artificial intelligence is advancing along two largely distinct paths. The first centers on generative AI powered by large language models, with the long-term objective of creating systems that can reason across domains at levels superior to those of human beings. The second focuses on embodied intelligence (i.e., robotics). In this space, the objective is not abstract reasoning but rather the deployment of capable machines that can operate effectively in the physical world. Over the last five years, capital and attention have overwhelmingly gravitated toward companies involved in generative AI, with the Bloomberg Artificial Intelligence Index up a staggering 276% in that time. Robotics, by comparison, has been widely viewed as a longer-dated theme, with the Bloomberg Robotics Index up only 77% over that same period (even less than the S&P 500 Index return of 134%). These dynamics can be observed in this week’s chart.

Going forward, there are reasons to believe that this performance trend may shift in the years ahead. For instance, human-level general intelligence could be far more distant than markets currently assume, and language models may not prove sufficient to reach it. At the same time, practical robots (e.g., warehouse automation, humanoid assistants, etc.) appear closer to commercial reality than previously believed, particularly in aging societies facing persistent labor shortages. One possible accelerant for robotics companies in the years ahead is the use of advanced simulation. By training in virtual environments, robots can acquire motor skills and coordination far more rapidly than through physical trial and error alone, potentially pulling forward adoption timelines relative to current investor expectations. Importantly, transformative impact does not require robots to achieve artificial general intelligence but rather functional capability (i.e., the ability to move objects, operate safely, and sustain useful work with sufficient battery life). Commercial momentum in robotics is already building. In 2024, for example, Agility Robotics opened a manufacturing facility in Oregon with capacity to produce up to 10,000 humanoid units annually, and Amazon has now begun testing Agility’s robots in its warehouses. Additionally, companies like Tesla are showcasing humanoid prototypes performing increasingly fluid physical tasks, and BYD has signaled interest in future household robotics. While price points remain prohibitive for mass adoption today, several structural forces are converging to improve the economics of robotics. Manufacturing costs are declining as scaling drives down prices for components like sensors and actuators, while improvements in AI models are enhancing robotic perception and control. Taken in tandem with the fact that generative AI leaders are currently investing heavily in costly, power-hungry data centers, it is fair to say that a once slower-moving, less glamorous segment of the AI ecosystem may now benefit from relative capital efficiency.

Despite these developments, markets continue to assign a significant valuation premium to generative AI over robotics, which can also be observed in the chart above. Factor analysis helps explain part of the gap, as AI-heavy indexes skew toward momentum and growth while robotics-oriented benchmarks exhibit greater exposure to value, quality, and, in some cases, even dividend income. Further, the generative AI complex is dominated by large technology platforms including Alphabet, Microsoft, and NVIDIA, whereas robotics companies tend to be more industrial in nature (e.g., automation specialists, automakers, and emerging consumer-robotics firms). This valuation disconnect suggests that investors may be overemphasizing long-term breakthroughs in cognition while underappreciating near-term progress in physical automation, especially as physical robots transition from research environments into factories, homes, and hospitals. Indeed, while much of today’s excitement centers on artificial brains, it may ultimately be robotic brawn that drives the next leg of growth within the technology sector.

Glass Half Empty

While the holiday season was once marked by bustling bars, readers may notice that nightlife isn’t what it used to be. Indeed, alcohol-oriented companies, long considered stable components of the Consumer Staples sector thanks to recession-proof attributes, are struggling to regain momentum after a post-pandemic boom. As can be seen in this week’s chart, the Bloomberg Global Alcohol Index, which tracks over 50 of the world’s top listed beer, wine and spirits producers, has exhibited a roughly 46% decline since the summer of 2021. Shares of European giants such as Diageo, Pernod Ricard, and Remy Cointreau now hover near multi-year lows, with many global peers notching similar declines.

There are likely many factors contributing to these performance headwinds for alcohol-oriented businesses, including rising costs, post-pandemic societal shifts (i.e., higher levels of solitude), and healthier lifestyle choices being pursued by consumers. Interestingly, a recent Gallup survey indicates that alcohol consumption by U.S. adults sits at a staggering 90-year low, with members of the Millennial and Gen-Z cohorts increasingly viewing drinking as less fashionable. This change in behavior is compounded by the rise of GLP-1 drug use for weight loss, as early indicators suggest that these medications are catalyzing behavioral changes that have led to a greater emphasis on health and well-being. Additionally, the options for partygoers outside of alcohol have rapidly expanded in recent years, with global consumers increasingly turning to non-alcoholic beverages and cannabis to fuel their holiday cheer. While demand for alcohol is unlikely to disappear completely, alcohol-oriented businesses will surely need to innovate and diversify to meet changing consumer preferences based on the trends described above.

Small Caps: Unprofitables Lead, Active Managers Lag, But Can it Last?

At the start of 2025, very few could have predicted the wild ride that awaited equity markets. After a volatile period that culminated on April 8, U.S. equities achieved several new all-time highs, with small-cap equities reaching a first all-time high since November 2021. Absolute returns have been substantial, as the Russell 2000 rose nearly 42% off the market bottom through October 31. Despite renewed volatility in November as expectations for another Federal Reserve rate cut fluctuated, small-cap equities have led large-cap equities since April 8. As is expected in the first six months of a bull market, low quality, including residual volatility, short interest, non-earners, and beta, propelled the small-cap market. Conversely, active managers favor high quality companies, typically characterized by high returns on equity, strong balance sheets, and low leverage. As a result, this factor backdrop is a known headwind for many active managers across the small-cap universe, and this bull market is no different.

No Small Headwind for Small-Cap Managers

Small-cap equities are in a prolonged period of underperformance relative to large-cap stocks, but this trend has shown early signs of reversing in the aftermath of intra-year market lows on April 8, with the Russell 2000 Index up roughly 41% since that time. Interestingly, unprofitable companies within the benchmark have led the way, gaining more than 72% compared to a relatively meager 29% for profitable constituents of the Russell 2000 Index. Although the overall small-cap equity market is currently in line with its average bull market return amid this run, recent performance of unprofitables far exceeds historical norms. This dynamic can be observed in the chart above.

One of the major consequences of this trend is significant underperformance of actively managed small-cap strategies, which typically eschew companies with poor fundamentals. Specifically, the average active small-cap blend manager (as represented by the Morningstar category average) has underperformed the Russell 2000 Index by more than 10 percentage points since April 8, an extreme not seen in roughly 25 years. On the positive side, active small-cap strategies have slightly outperformed profitable small-cap companies, which are more likely to be included in these types of funds. Should this persist, it may be a tailwind for active managers, as profitable companies may have additional upside from here based on trends observed in prior bull markets. That said, more accommodative monetary policy and fiscal support may lead to additional strength from unprofitables and, as a result, further underperformance of active managers.

3Q 2025 Market Insights

This video is a recording of a live webinar held October 22 by Marquette’s research team analyzing the third quarter across the economy and various asset classes as well as themes we’ll be monitoring through the rest of 2025.

Our quarterly Market Insights series examines the primary asset classes we cover for clients including the U.S. economy, fixed income, U.S. and non-U.S. equities, hedge funds, real assets, and private markets, with commentary by our research analysts and directors.

Featuring:
Greg Leonberger, FSA, EA, MAAA, FCA, Partner, Director of Research
Frank Valle, CFA, CAIA, Associate Director of Fixed Income
James Torgerson, Senior Research Analyst
Catherine Hillier, Senior Research Analyst
David Hernandez, CFA, Director of Traditional Manager Search
Evan Frazier, CFA, CAIA, Senior Research Analyst
Dennis Yu, Research Analyst
Amy Miller, Associate Director of Private Equity

Sign up for research alerts to be invited to future webinars and notified when we publish new videos.

If you have any questions, please send our team an email.

The Calm Before the Storm?

I spent the past weekend at my alma mater to watch them play their biggest rival. Football weekends there are filled with celebrations, traditions, and of course, tailgating. Saturday was a quintessential Midwestern day to be outside: sunny, low 70s, light breeze — no better conditions for food and drinks in the parking lot. About three hours before kickoff, however, massive thunderstorms rolled in which sent fans scurrying for cover and threatened to delay the game. For fans who hadn’t checked the forecast, they were ill-prepared to stay dry and enjoy the game as it rained for the duration of the match. Nonetheless, the stadium stayed full for the entire game, a testament to the home team’s performance as well as fan loyalty. That said, I saw plenty of cold and wet attendees in the concourse after the game — those who weren’t equipped for the conditions undoubtedly wished they had been better prepared for what the environment brought Saturday.

On my drive home Sunday, I couldn’t help but worry if as investors we find ourselves right where I was Saturday afternoon, wondering if the conditions were too good to be true for a mid-October day in the Midwest.

Two Sentiments Diverged

This week’s chart compares institutional and retail investor sentiment using two established indicators. Institutional sentiment is represented by the National Association of Active Investment Managers (NAAIM) Exposure Index, which measures the average U.S. equity market exposure reported by NAAIM member firms (i.e., organizations that actively manage client portfolios). Reported exposures for this index include -200% (leveraged short) to -100% (fully short), 0% (market neutral), +100% (fully invested), and +200% (leveraged long), capturing the breadth of positioning from extremely bearish to highly bullish. Retail sentiment is represented by the American Association of Individual Investors (AAII) Sentiment Survey, which reflects the bullish-minus-bearish spread regarding the six-month outlook for stocks across individual AAII members (i.e., retail investors). When analyzed together, these indicators offer perspective on how both institutional and individual investors view the near-term prospects of equity markets.

Readers will note that these two indices have moved in tandem throughout most of the last several years but have diverged significantly in recent weeks as retail investor sentiment has plunged. It is not entirely clear what’s driving this latest divergence, but several factors likely play a role. Specifically, renewed U.S.–China trade tensions, the ongoing federal government shutdown, and interest rate uncertainty have likely weighed more heavily on retail investors, who tend to be more influenced by headline noise. Institutional money managers, on the other hand, appear to be maintaining confidence in healthy corporate fundamentals and the broader economic backdrop. Regardless of its exact cause, this divergence underscores the notion that sentiment data should be viewed as context-dependent rather than as a market timing signal.

The Paths to Liquidity

After a three-year drought, the IPO market is stirring again… but only for a select few. Just 18 companies have gone public in the U.S. through the end of June, which puts 2025 on pace to be the slowest year for IPOs in a decade (though total exit value this year has already surpassed 2024 levels). The companies that have listed thus far in 2025 have looked markedly stronger from a fundamental standpoint than those in the 2021 cohort. Indeed, nearly a quarter are profitable, with average revenues above $800 million and median valuation-to-revenue multiples around 4x (down from roughly 17x a few years earlier). This new IPO class has clustered around themes like artificial intelligence, cryptocurrency, defense, and space, all of which have been buoyed by government policy and widespread investor interest in growth.

This being said, the secondary market has quietly become a powerful alternative source of liquidity that has reshaped the venture capital ecosystem. According to PitchBook, U.S. venture secondary transactions reached $61.1 billion over the past year, slightly exceeding VC-backed IPO exit value and accounting for nearly one-third of all venture exits. “Mega-unicorns” such as SpaceX, Stripe, Databricks, and OpenAI have actively launched tender offers and secondary SPVs to provide liquidity for employees and investors while remaining private enterprises. The secondary market has expanded rapidly in recent years, with dedicated dry powder reaching $8.2 billion in 2024 (up from roughly $4 billion in 2022) and SPV capital raising surging more than tenfold. Still, despite this remarkable growth, secondary exit value remains a small slice of the venture ecosystem at just 1.9% of total unicorn market value.

The result of these dynamics is a tale of two markets: One public and highly selective, the other private, flexible, and increasingly institutionalized. While acquisitions continue to account for most venture exits by volume, the evolving dynamic between IPOs and secondaries is redefining how liquidity is delivered to investors… and redefining what “going public” really means in today’s venture landscape.

2025 Investment Symposium

Watch the flash talks from Marquette’s 2025 Investment Symposium livestream on September 26 in the player below — use the upper-right list icon to access a specific presentation.

 

Please feel free to reach out to any of the presenters should you have any questions.

The Running of the Bulls

Barring a significant equity market drawdown in the coming weeks, the current bull market will turn three years old in October. The gains posted by the S&P 500 Index during this time have certainly been robust, with the benchmark delivering 24% and 36% returns in the first and second 12-month periods of the current bull market, respectively. This strong performance has led many investors to question if stocks will continue to deliver in the near future. Interestingly, bull markets in decades past have seen positive stock returns well into the third, fourth, and fifth years; however, these gains tend to be more muted than those notched in the first two years. Over the last 50 years, the pattern has often been the following:

  • Year one: Explosive gains are recorded as markets rebound from oversold conditions. The average return of the S&P 500 Index in the year after a bear market trough is roughly 37%.
  • Year two: Equity returns are still strong but less extreme, with the S&P 500 Index averaging a return of 17%. Earnings growth and investor confidence begin to stabilize.
  • Years three–five: Equity momentum slows. Average returns compress to 8%–13% and markets become more vulnerable to corrections.

To expand on the final bullet point, the third, fourth, and fifth years of a bull market often prove shakier given the convergence of several structural factors. For instance, early in the cycle, central banks and governments typically provide aggressive stimulus to allow markets to recover from troughs; however, inflation and financial stability risks typically arise within a few years. These factors usually prompt tightening from policymakers, which can constrain equity performance. At the same time, the sharp rebound in corporate profits that characterizes the first two years begins to normalize, making year-over-year comparisons less favorable. Valuations, which tend to increase in the early innings of a bull market as confidence returns, also usually peak around year three. This causes any future stock gains to be more dependent on genuine fundamental improvements (i.e., earnings growth) rather than continued multiple expansion. Finally, after two years of strong performance, investor sentiment often shifts from optimism to caution, with growing fears that current conditions may not persist. While it is impossible to predict the trajectory of equity markets from here, it may be prudent for investors to expect more muted gains from stocks in the years ahead simply based on historical patterns.