Value vs. growth stocks: The pros predict which will outperform amid lower rates
Investors often get bullish on stocks when interest rates start inching lower. That certainly was the case as markets anticipated the start of the U.S. Federal Reserve’s easing cycle, which kicked off with a jumbo cut last month . The S & P 500 stock index is around 24% higher year-to-date and up 40% over the last 12 months. There’s a common belief that lower borrowing costs benefit so-called growth stocks, as they’re often capital-intensive. Tech stocks and small caps tend to be classed as growth stocks, which are expected to rise at a faster rate than the rest of the market. There are other factors at play now, however, and some now believe that value stocks — generally thought to be undervalued — can outperform in the current environment As investors weigh the pros and cons of each, CNBC Pro asked analysts and investors which they favor: value or growth stocks. Economic risks Adam Turnquist, chief technical strategist for LPL Financial, said that under the current economic backdrop, he expects value stocks to outperform growth names as risks of an economic contraction start to decrease. “History also suggests value should outperform growth, at least over the six months following the first rate cut,” he said. If the economic situation becomes a “hard-landing,” however, he said that growth stocks could outperform. “Most growth indices are heavily weighted toward mega-cap names and quality factors,” said Turnquist. “Most of these companies have impressive earnings growth, low leverage, generate massive free cash flow, fortress balance sheets, and wide moats, making them potential safe havens in times of uncertainty and/or when growth becomes scarce.” However, Savita Subramanian, BofA Securities head of U.S. equity and strategy, urged investors to “stick with value.” “The Fed is cutting interest rates as the profit cycle is accelerating — this is unusual. As you know, the Fed is usually cutting into a slowing economy, a slowing profits environment. This time it’s different,” she told CNBC’s “Closing Bell” last month. “We’ve really seen [value] start to work, we’ve seen earnings broaden out in tandem. I think it’s … all cylinders are firing for a nice long value cycle.” Historic outperformance Vahan Janjigian, chief investment officer at Greenwich Wealth Management, has been favoring value stocks for a while now – and the majority of his portfolio is in value names. Value stocks have a history of outperforming growth stocks over the long term, he said, although he acknowledged this hasn’t happened in the past 15 years or so due to the “unprecedented” zero-interest rate regime. “Now, even though the Fed is reducing rates again, the more important question is what does the yield curve do? If it normalizes (i.e., becomes more upward sloping), value should outperform growth,” he said, referring to a situation where short-term rates are lower than long-term rates. Janjigian said that if interest rates and yield curves normalize, he would expect the performance of stocks to also normalize. “That means this extended period of growth outperforming value should come to an end,” he said. So far this year, the Vanguard Russell 1000 Value Index Fund ETF is up around 16%, while the Vanguard Growth Index Fund ETF is around 22% higher. VTV VUG 1Y mountain Value vs. growth ETFs In a note last month, Barclays’ U.S. equity strategy noted that value stocks do tend to outperform their growth counterparts following rate cuts, although not consistently. “In past non-recessionary rate cutting cycles, median Value returns surpassed those of Growth immediately after the “first” rate cut … but inconsistently,” the analysts led by Venu Krishna wrote. After three months, “growth outperformance takes over and with more consistency, i.e. there could be more Growth upside ahead if we are on track for a soft landing,” they added. Risk/reward George Ball, chairman of investment firm Sanders Morris, is another market expert on team value. “Lower multiple value stocks have greater upside and less risk than the pricier ‘glamor growth’ group for the foreseeable future,” Ball said. “In a period of declining interest rates, the value sector is a two-edged sword: better gain potential and less downside exposure.” For Barclays’ Krishna, however, although both styles of investing can benefit from falling rates, “the upside for Growth stocks is likely higher in non-recessionary scenarios.” Although he did concede some risks to his thesis, including the upcoming U.S. Presidential election and more upside in returns on the S & P 500, “both of which have been historically beneficial for Value.”
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