Top of Mind - June

Since the beginning of 2023, Mega cap stocks such as Apple, Amazon, and Meta have surged, reclaiming the multiyear dominance they enjoyed before 2021 and pulling Growth stocks along with them for the ride.

Growth stocks were last dominant during the pandemic, their rapid expansion fueled by government stimulus and low interest rates. In 2022, the Federal Reserve was forced to raise interest rates to combat post-pandemic inflation. In response to this new interest rate reality, NASDAQ, which is comprised of high-growth companies, dropped 33% in 2022 — and our data-driven model signaled for us to move from an overweight in Growth stocks to an overweight in Value stocks.

In 2023, we have seen a reversal of fortunes, with the NASDAQ up more than 24% through the first five months of the year. Last week, our data-driven model signaled for us to move from an overweight in Value stocks to an overweight in Growth stocks.

In recent conversations with clients, we’ve discussed our rationale for this rebalance; factors that lead to strong Growth performance; and how long this strength will last.

Why did you shift portfolios from an overweight in U.S.Large Cap Value and U.S. Pure Value to an overweight in U.S. Large Cap Growth?  

Our model moving towards Growth stocks is likely the result of the market turning its eye toward looming economic weakness. As a result, the prevailing risk is no longer that Growth stocks are poised to underperform as valuations recalibrate, but rather that Value stocks could underperform as we enter a period of economic weakness.

While it may seem counterintuitive to assume Value stocks would lag in a market where economic growth is less robust, Value stocks tend to be more levered to the economy, owing to their more cyclical nature. History reveals Value stock underperformance during periods of economic weakness as the more cyclical financials, industrials, and energy sectors tend to carry a larger weight in value indices than more defensive healthcare, utilities, and consumer staples sectors.

What drives outperformance in Growth stocks?

In the world of investing, Growth stocks and Value stocks have long been subjects of debate among market enthusiasts.[1] In general, there are three main reasons why we believe Growth stocks outperform Value stocks at any given time:

1. ‍Economic Conditions and Investor Expectations: During periods of economic expansion and low interest rates, investors tend to have higher expectations for future earnings. They are more likely willing to pay a premium for companies with strong growth prospects, which characterizes Growth stocks. Conversely, Value stocks, which are typically associated with more mature companies trading at lower valuations, may be overlooked.
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2. ‍Technological Innovation and Disruption: The rapid growth of technology and innovation has played a significant role in driving the success of Growth stocks. Many Growth companies operate in sectors such as information technology, biotechnology, e-commerce, and renewable energy, which have experienced remarkable advancements and disruption. Investors are naturally attracted to these companies due to their potential for high revenue growth, market dominance, and scalability.
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3. Shifting Investor Sentiment and Preferences: Market sentiment and investor preferences also contribute to the outperformance of Growth stocks. In recent years, there has been a strong appetite for companies with compelling growth narratives, even if their valuations appear high.

How long will strength in Growth stocks last?

It is hard to say how long any trend can last, but the pricing activity of 2023 is hard to ignore. While Growth stocks are back in the spotlight, it is important for investors to recognize that market dynamics can change, which is why we rely upon a data-driven, momentum-based model to help steer investment decisions. Our model is designed to pick up on trends that will allow our portfolios to capture upside, and our tactical investment methodology allows us to be nimble when, not if, reallocations are warranted.

Thank you for taking the time to read this monthly update. My team and I are always available and happy to answer questions as they arise. Please do not hesitate to reach out.

[1] Wall Street's Greatest Rivalry: Growth Versus Value (Balentine)