Thomson Reuters research desk is ringing the proverbial bell in the stock market, saying “growth stock days are gone, value back in play.”
The report underlines how the latest leg of the most-extended bull market: buy the f*cking dip (BTFD) for growth stocks paid off, massively.
For more than five years, BTFD for shares of fast-growing companies like Facebook, Amazon, Netflix, Google (FANG) worked out very well, beating their value rivals by a margin of more than two-for-one in that span.
Until November came around.
Reuters said the wheels have literally “fallen off that profit vehicle.” The Russell 1000 Growth Index, which tracks stocks that trade at high multiples relative to their earnings, entered correction territories and or bear markets in October, warning that it was one of the worst months since the Great Financial Crisis. In that same period, the Russell 1000 Value Index is down only 7%.
“That shift was cast into sharp relief last week after major revenue shortfalls reported by both Amazon and Alphabet triggered the largest drops in their stock prices in years. Nasdaq, stacked with growth names from the tech sector in particular, is in a full-fledged correction – the term for a fall of at least 10% from the most recent peak.”
According to the Reuters research desk, the gap in performance between Russell’s growth and value indexes hit the widest level in 40-years (shown below on the Reuters Eikon Datastream via Chuck Mikolajczak).
Reuters said previous instances of widening eventually led to a turning point (Dotcom Bust), where value stocks like JPMorgan Chase, Exxon Mobil, and Johnson & Johnson benefited handsomely.
“When the rotation started to go back the other way, sort of reversion to the mean, value went on to outperform growth for several years. It was a longstanding reversion-to-the-mean kind of a trade,” said Phil Orlando, chief equity market strategist at Federated Investors, in New York.
From its Sept. 20 high, the S&P 500 is now down 9%, with the risk of entering correction territory, as heavily weighted sectors, such as technology and consumer discretionary, contributed to the nasty decline.
Both sectors have been crushed in the last three week and include growth stocks such as Amazon, and Alphabet, leading some analyst to believe a full-blown rotation into value stocks has already started.
According to FTSE-Russell data via Eikon, technology accounts for a weighting of nearly 35% in the Russell 1000 growth index, followed by an 18.8% weighting in consumer discretionary.
In terms of a forward price-to-earnings ratio, growth stocks remain expensive despite the recent downturn, making the argument for value stocks even more appealing to investors.
Steve DeSanctis, an equity strategist at Jefferies in New York, told Reuters that investors probably want to own value stocks now.
“We are starting to see earnings accelerate faster for value than for growth, and if GDP is going to be north of 3%, we should see a pretty good earnings backdrop,” DeSanctis said.
Reuters made the point that this month’s shift to value could be a “full rotation as the bull market enters its late-cycle stages, or merely a temporary defensive play,” similar to earlier this year when the S&P 500 tumbled into correction territory in February.
Julian Emanuel, a chief equity and derivatives strategist at BTIG, told Reuters that the current environment versus earlier this year is that the Federal Reserve is more determined in tightening the liquidity nose, which has resulted in higher yields on U.S. Treasury securities.
“Investor psychology has shifted to the idea that long-term yields are rising. When that happens it’s an implicit negative for high-multiple stocks, which tend to reside in the growth category,” Emanuel said.
Add Reuters to the list of research firms indicating that US tech stocks have reached the top.
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