Broad Market Gains Shape Moat Strategies for 2025

In November, U.S. equity markets surged to new record highs, marking one of the best monthly performances of the year. The conclusion of the U.S. presidential election brought a wave of optimism to the market, as investors responded positively to the prospective changes in policy directions. This led to broad market gains, with small caps outperforming large caps, suggesting a broadening of the rally. The market was further buoyed by strong consumer spending data and Fed commentary noting confidence in easing inflationary pressures and labor market strength, which together painted a picture of sustained economic growth. Despite the generally bullish sentiment, there was some volatility as investors adjusted their portfolios in anticipation of the new administration's policies.

The Morningstar Wide Moat Focus Index (the “Moat Index”) also had a strong showing in November, rising 4.46% during the month, but trailing the broader S&P 500, which gained 5.87%. An overweight allocation to the health care sector, which was largely flat during the month, and the exclusion of a few soaring technology names, namely Tesla, were primary factors in the lagging performance. With just a few weeks of performance left in 2024, the Moat Index, and most other market segments, are unlikely to overtake the top-heavy S&P 500 on the year, but may be well-positioned heading into the new year as investors lock in 2024 gains and adjust their portfolios for potential broader market participation in 2025.

For the first time since July, smaller-cap stocks outperformed their large-cap peers and did so by a notable margin. The broad small-cap benchmark gained 11% and the mid-cap benchmark about 9%, both posting their best monthly performances of the year. The Morningstar US Small-Mid Cap Moat Focus Index (the “SMID Moat Index”) also participated in the small-cap rally, gaining nearly 7%, but trailed the benchmarks in part due to some earnings-related volatility. The rally in small-caps this month marks a notable change in risk appetite, and given that valuations remain at decade lows relative to large-caps, this could be viewed as the beginning of a potentially longer trend.

Small-cap Stocks Lead in November Surge

Source: Morningstar. Data as of 11/30/2024. Large Caps represented by the S&P 500 Index; Mid Caps represented by the S&P MidCap 400 Index; Small Caps represented by the S&P SmallCap 600 Index. Past performance is no guarantee of future results. Index performance is not representative of fund performance. It is not possible to invest directly in an index. Fund performance current to the most recent month end is available by visiting vaneck.com or by calling 800.826.2333.

Moat Index Highlights: Factory Floors to Fantasy Lands

Carrying over from last month, earnings-related volatility continued to be a notable driver of performance as markets adjusted to the latest quarterly updates. Strong performance within the industrial and technology sectors also stands out with several names from these segments landing in the top contributors table for the month.

Topping the list for contributors this month is the wide moat industrial automation company, Emerson Electric (EMR). With roots dating back to the late 1800s, Emerson has become a leading specialty industrial machinery company that sells a wide range of software and hardware aimed at helping customers automate their manufacturing processes to increase both productivity and safety. Emerson announced strong Q4 earnings results that sent the shares of the company soaring more than 20% during the month. Morningstar raised its fair value estimate for EMR and continues to view its industrial automation business favorably. owever, with shares now trading at a premium to even the increased fair value estimate, EMR may be a candidate to rotate out of the index during the upcoming reconstitution.

Another top performer within the Moat Index was the iconic media and entertainment company, Walt Disney Co. (DIS). Like Emerson Electric, Disney also benefited from a strong earnings release that moved share prices up about 22% during the month. Morningstar senior equity analyst, Matthew Dolgin, raised his fair value estimate for Disney and commented the below in his analyst note.

October’s top contributor, electronic trading platform leader MarketAxess (MKTX), found itself among the top detractors in the Moat Index as it gave back some gains following earnings that fell short of expectations. Other top detractors for November include specialty ingredients producer International Flavors & Fragrances (IFF), medical diagnostics product developer Bio-Rad (BIO), drug manufacturer Pfizer (PFE) and independent military shipbuilder Brown-Foreman (BF.B).

Top Contributors and Detractors from Moat Index - November 2024

Leading Contributors

Leading Detractors

Source: Morningstar, November 2024. Past performance is no guarantee of future results. Index performance is not illustrative of fund performance. Not intended as a recommendation to buy or to sell any of the securities mentioned herein.

SMID Moat Index Highlights: Purses and Passengers

Like its larger-cap sister index, earnings releases also played a key role in determining the top performance contributors and detractors of the smaller-cap SMID Moat Index in November. From a sector perspective, strong performance within financials and technology stood out, while materials was a notable laggard with the four largest detractors all belonging to this sector.

The luxury fashion and accessory brands parent, Tapestry Inc. (TPR), topped the list of leading contributors after the company delivered revenue and earnings that exceeded expectations as well as raising their full-year outlook. Shares of Tapestry soared more than 30% during the month on the news and now trade more in line with Morningstar’s $59 estimate of fair value. Another name helping drive performance this month, also off the back of a positive earnings release that sent shares up 33%, was the ride-sharing service provider, Lyft (LYFT). Morningstar raised its fair value estimate from $15 to $20 and believes Lyft is well on its way to becoming a one-stop shop for on-demand transportation, citing its expansion into bike- and scooter-sharing markets and its pursuit of autonomous vehicles transportation.

Names that detracted most from SMID Moat Index performance during the month largely fell in the materials sector, including Celanese (CE) which is one of the world's largest producers of acetic acid directives and specialty polymers used in industrial and medical applications, home lawn and gardening products company Scotts Miracle Gro (SMG), the diversified global chemicals producer Dow Inc. (DOW), specialty ingredients producer International Flavors & Fragrances (IFF), and electronic trading platform leader MarketAxess (MKTX).

Top Contributors and Detractors from SMID Moat Index - November 2024

Leading Contributors

Leading Detractors

Source: Morningstar, November 2024. Past performance is no guarantee of future results. Index performance is not illustrative of fund performance. Not intended as a recommendation to buy or to sell any of the securities mentioned herein.

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Source for all data unless otherwise noted: Morningstar.