- Investors have fled growth stocks this week in favor of companies that are considered cheap.
- This sudden and decisive rotation exposes how vulnerable investors have become to swings of this nature, according to Peter Oppenheimer, the chief global equity strategist at Goldman Sachs.
- In a recent note to clients, he explained why the rotation would most likely be short-lived and how to align with the longer-term winners.
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Growth stocks are falling out of bed.
Since last Friday, investors have been dumping the high-flying cohort of companies with rosy earnings-growth prospects. These stocks were also associated with the so-called momentum factor because they happened to be among the strongest performers of this bull market.
The rotation away from growth and momentum stocks has benefitted those considered cheap, the so-called value stocks.
There arevalid arguments about whether value stocks are making their long-awaited comeback. But for Peter Oppenheimer, the chief global equity strategist atGoldman Sachs, the more definitive takeaway is that investors will be more vulnerable to swings as violent as the one they experienced over the past few days.
To understand why, look no further than the relative performance gap between growth and value stocks.
On a global scale — using the MSCI World index as a benchmark — growth has been outperforming value since the mid-2000s, in the longest and most powerful stretch since the early 1970s, according to data compiled by Goldman Sachs.
The monstrous outperformance of momentum stocks also applies to the US, especially during this bull market.
Quant strategists at Nomura observed that both the long and short end of the Russell 1000 momentum factor contributed to its recent strong performance. In other words, investors were fervently crowding the winning stocks and abandoning the losing stocks in a rare manner that, in hindsight, was a recipe for disaster.
“Given extreme positioning in ‘momentum’ and quality, any rotation could be powerful even if it is short-lived,” Goldman’s Oppenheimer said in a recent note to clients.
Why the rotation may be short-lived
It would be premature to characterize this unwind as the death knell for growth stocks, Oppenheimer said. In fact, his view is quite the opposite: that the conditions for a structural leadership shift from growth to value have not yet been met.
If that’s the case, what factors caused the shift that took place this week, and why may they not stick? Oppenheimer provided answers to these two questions.
As for why investors fled growth stocks, he pointed to a rebound in expectations for broad-based economic growth, witnessed in the jump in global bond yields beginning Friday.
It seems counterintuitive that growth stocks would be punished when expectations for the future were improving. Oppenheimer noted, however, that a huge part of their appeal had been a hunt for “pure” growth themes like US big tech, at a time when global profits were lackluster. This hunt also raised the premium for so-called quality stocks with strong balance sheets and cash flow.
“For markets to change leadership, we therefore need to see an improvement in sequential growth expectations, higher bond yields and lower policy uncertainty,” Oppenheimer wrote.
He added: “The current rotation is unlikely to last structurally, in our view — if bond yields remain low and growth stays weak, the old leadership is likely to reassert itself.”
“Old leadership” here refers to none other than growth stocks. TheiShares S&P 500 Growth exchange-traded fund is the largest basket of companies expected to grow their earnings at an above-market rate.
Get the latest Goldman Sachs stock price here.
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