Growth stocks have been in a long-term uptrend for more than a decade, but value stocks showed some signs of a comeback last year. During the fourth quarter when the market crashed, the iShares S&P 500 Value ETF (IVE) outperformed the iShares S&P 500 Growth ETF (IVW) by 2.4 percentage points.
Can that trend last? Probably not, according to some analysts.
U.S. economic growth has been decelerating since late last year, as have the consensus estimates for U.S. companies’ revenue growth. This has historically been good news for growth stocks, not value. “When economic growth has been scarce, investors have flocked to stocks that do not need the economy to grow to generate top-line and bottom-line growth,” wrote Ed Clissold from Ned Davis Research in a Wednesday note.
Goldman Sachs’ David Kostin has some data to prove it. Since 2011, when U.S. economic growth—measured by Goldman Sachs’ Current Activity Indicator (CAI)—has slowed by more than 0.5 percentage point in a month, the bank’s internal basket of high-growth stocks—50 S&P 500 companies with the fastest expected 2019 sales growth within their respective sectors—has produced a median excess return of 0.35 percentage points a month compared with the S&P 500 (.SPX).
In November, the CAI has declined 0.7 percentage point. Since then, the growth basket has outpaced the broader index by 2.5 percentage points, wrote Kostin in a Wednesday note.
The basket companies are expected to increase sales by 17% in 2019, that is more than four times faster than the 4% median growth of S&P 500 stocks. Some of the latest constituents include Cigna (CI), Wabtec (WAB), Marathon Petroleum (MPC), International Flavors & Fragrances (IFF), Dominion Energy (D), CVS Health (CVS), and WellCare Health Plans (WCG).
A friendlier Federal Reserve might help growth stocks rise further, says Kostin. The central bank has turned dovish in its monetary policy since the beginning of this year, signaling a pause in interest rate increases and a possible end to the balance sheet reduction by the end of the year. This means the yield curve could remain flatter for longer.
A flat yield curve will negatively impact companies in the financial sector, because some of their profits come from borrowing short-term bonds and lending long-term ones to harvest the rate gap in between. Since the financial sector makes up a large portion of value stocks, value is likely to see a drag relative to growth.
That isn’t to say there is no headwind for growth stocks. Growth companies are currently trading at higher valuations compared with history, limiting their potential for more outperformance. The market has also seen some recovery in commodity prices lately, which could drive the value-tilted energy and materials stocks higher. This could counterbalance some of the other factors favoring growth, says Ned Davis Research’s Clissold.
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