Since the post-Liberation Day bottom in April, the market has shifted significantly towards riskier areas. Today, we look at the performance and strength of stocks depending on their beta and volatility.
It was the best of times, it was the worst of times. So far in 2025, it’s been a tale of two markets, with the domestic equities looking entirely different before and after the post-Liberation Day bottom in April. One of the biggest changes in the market from April has been the shift from low-risk equities in favor of more high-octane areas. Two of the most common approaches to measuring the riskiness of a stock are its standard deviation and beta. On April 8th, the Invesco S&P 500 Low Volatility ETF (SPLV) was down only 2.7% YTD while the Invesco S&P 500 High Beta ETF (SPHB) was down 24.1%. Since then, the market is back to all-time highs while SPHB is up 55.2%, which is 48.3% more than SPLV. While the two funds can give us some idea of the performance of riskier and less risky equities, it doesn’t provide a full picture.
To look at things further under a microscope, we split the S&P 500 (SPX) into five baskets (quintiles) depending on their three-year standard deviation and beta entering each year since 2015 (excluding companies acquired intra-year). The highest volatility and beta names have been the best performing groups so far this year, but their path to get there has been anything but steady. The riskier groups were laggards through April, but with growth areas pushing the market higher, the riskier groups have steadily outperformed in each month since then.
In addition to looking at the group’s performance, we can use relative strength and participation readings to quantify what type of stocks are most in favor. Currently, the highest beta stocks hold an average technical attribute score of 3.17, which is 0.83 points above the lowest beta group. Interestingly, the TA score of high volatility names is only marginally higher than low volatility stocks. Participation readings are generally higher for the riskier stocks, but especially so for high beta stocks. Looking at intermediate-term participation, 79% of high beta stocks are on a buy signal compared to only 65% of low beta stocks. Meanwhile, 73.5% the highest volatility stocks are on a buy signal, which is below the 3rd and 4th decile, but substantially above the low volatility group's 51.5%.
While looking at the strength of different valuations may assist with determining favorable stock characteristics, it can also shed light on what type of market environment we’re in. In theory, bull markets should favor stocks with higher systemic and overall risk while bear markets should see less risky (and potentially less cyclical) stocks perform better. With the exceptions of 2016 and 2024, high beta stocks beat low volatility stocks in every up year while underperforming in every down year. The trend is slightly murkier for volatility, as highly volatile names defied expectations in 2016, 2017, 2019, and 2024. Focusing back on this year, high risk names doing well adds at least some weight to the notion that we’re in more of a risk-on environment.
The recent preference for riskier stocks also aligns with what relative strength is telling us. Looking again at SPHB, it holds a nearly perfect fund score of 5.80 and a sharply positive score direction of 4.72, highlighting its significant return to strength. The fund is on two consecutive buy signals and returned to a positive trend in May. On its market RS chart, it recently completed its third consecutive market RS buy signal after reversing back into a column of Xs in May. Although, the fund is at the top of its ten-week trading band with an overbought/oversold reading of 97%, so it could see some cooling down in the near-term. Meanwhile, SPLV holds a weak fund score of 2.65, in addition to a negative score direction of 2.19. It also reversed into a column of Os on its RS chart versus the S&P 500 and is one box away from moving back to an RS sell signal, showcasing its deterioration relative to the rest of the market. It’s also on a sell signal and faces heavy resistance at $75. Overall, riskier stocks and growth areas are responsible for much of the market’s rebound over the last few months and continue to hold some of the most relative strength.
