So far this year several macroeconomic issues have threatened to negatively impact financial markets. Yet U.S. equities have shrugged off all of these headlines and outperformed most peoples’ expectations. This week’s Chart of the Week takes a closer look at this strong return for the S&P 500 through July. Year-to-date, all of the positive performance has come from valuation appreciation. As a result, the trailing 12-month P/E ratio is now over 20, which is near its highest level over the last ten years. EPS, on the other hand, has actually fallen during the year, which is in stark contrast to the previous ten years when EPS growth was the main driver of price return. This phenomenon can be observed across the cap spectrum and in both value and growth indices.

Going forward, things may finally start to catch up with the U.S. equity markets. In addition to lower earnings, GDP growth has been weak the last three quarters, falling short of expectations each time. Furthermore, elections often affect markets negatively due to the increased uncertainty associated with a change in president, and with both candidates carrying unprecedented unfavorable ratings, the volatility impact may be magnified. If earnings do not reverse their recent downward trend, U.S. equities could be in for a rough second half of the year.

This week’s Chart of the Week examines the pattern of monthly declines for the S&P 500 which are 5% or greater. Data going back to 1945 shows the months of August and September have historically seen the greatest frequency of equity market declines of this magnitude. In fact, nearly one-third of all monthly declines that were 5% or greater occurred during August and September. While historical occurrences such as this do not represent an absolute for equity markets, investors are entering a period that has historically produced below-average returns.

The old adage of “sell in May and go away” did not materialize in 2016, but it is important to remember just how much ground equities have recovered since the substantial drop in equity markets at the start of the year. With a year-to-date return of +7.7% through the end of July, the S&P 500 has advanced +18.8% from its February 11th low. Additionally, the S&P 500 notched seven new closing highs during the month of July. With equity markets continuing to test new all-time closing highs, the historical pattern of consolidation during the third quarter looks to be increasingly probable in the near term.

Most investors likely understand what is known as “fundamental” investment analysis: analysts assess a company’s health based on revenue, earnings, cash flow, and other financial and economic indicators. An alternative method of identifying attractive investments is “quantitative” investment analysis, and this approach has soared in popularity over the past few decades. Quantitative analysis features complex mathematical models which incorporate statistical and economic variables including valuation ratios, risk measurements, and trading behaviors of a stock, though the possibilities for variables are nearly endless. The advent of social media has even made it possible to include behavioral variables that adjust for investor sentiment.

As charted above, the average “quant” fund has outperformed the average fundamental fund on a trailing 1-, 3-, 5-, and 7-year gross-of-fee basis within the eVestment universe, a database used to track investment products. This recent outperformance is in stark contrast to the same trailing numbers just seven years prior (2009), shortly after the Financial Crisis. Critics argue that because many models use similar inputs, there is a large overlap in holdings amongst quant managers and that during a negative inflection point in the market, many portfolios are trying to dump the same stocks; the trailing performance as of 3/31/2009 certainly supports this argument. However, quant managers that survived the financial crisis argue that they have since built more adaptable models. Additionally, the amount of data readily harvested and available has grown exponentially over the past decade, which could help quantitative models become more robust.

What lies ahead for quant funds if the markets are hit swiftly with a large downturn? If the Brexit is any indication, albeit a very mild one, quant managers may have in fact prepared themselves for such a situation. For the second quarter of this year, quant managers were flat with or slightly below fundamental managers on a gross-of-fee basis. Considering quant funds typically charge much lower fees than fundamental funds, if they are able to adapt in a swiftly changing market environment, then they may prove useful as a low-cost option within a portfolio.