D A N T E S O U T L O O K
Tech heavy growth stocks have massively outperformed the S&P 500 over the past six years. All the while, investors have shunned value stocks. A reversal from growth to value is long overdue, but it's not necessarily a bad omen for the S&P 500. Instead, we see near-term opportunities in the under-owned, less expensive, value sectors of the market such as financials and energy.
The chart below shows the wide divergence in relative performance of the Russell 1,000 large/mid-cap growth and value factors. Interestingly, Russell 2,000 small-cap growth stocks (dotted line) have lagged their larger counterparts, which is mainly due to its sector exposure.
Here we see the value ETF having the most exposure to the financial sector, which has long underperformed the broader market, partly due to the low rate environment which hurts bank margins. Small-cap growth is most exposed to healthcare, tech, and industrials; the latter of which has detracted from relative performance. Not surprisingly, tech and consumer discretionary make up most of the growth factor.
As we expect continued market strength (albeit with changing leadership), investors can realize near-term upside potential in both small-cap growth and large/mid-cap value stocks. Both factors are relatively cheaper based on their price-to-equity ratio (shown in the table below), although there is little difference in the variability of returns as expressed by standard deviation. Notice the recent acceleration in returns from the 2018 broad market sell-off, which triggered a massive rush to large/mid cap growth stocks.
That rush to growth was too far, too fast as shown in the relative chart below. We expect growth stocks to produce lower returns versus value stocks over the near-term given extreme levels of outperformance. This is the most overbought period for growth versus value, which suggests the recent breakout is a false move and in need of a short-term breather. Further, while the relative up-trend of growth versus value remains intact, there has been an extreme deviation from its trend line since 2017-2018 that could lead to a brief period mean reversion (value outperformance).