The SPDR S&P 500 ETF Trust (NYSE: SPY) has now rallied 37.3% since March 23, but there has been a subtle shift in market leadership in the past couple of weeks.
Value stocks have outperformed growth stocks as buying volume has rotated out of the best-performing stocks of the year and into some of the laggards, but LPL Research analyst Jeffrey Buchbinder said Monday there are several reasons why value stocks’ time in the sun may be short-lived.
5 Reasons Growth Stocks Are Still King
Buchbinder said the impressive breadth of the stock market’s rally off of March lows is encouraging for investors and suggests stocks are still a better bet than bonds overall for the remainder of 2020 and in the long-term. However, he listed at least five reasons it’s unlikely value stocks will continue to beat out growth stocks as the economy recovers:
- The next phase of economic recovery will be more difficult, and growth stocks don’t necessarily need a healthy economic backdrop to continue to expand.
- Growth stock earnings estimates have held up relatively well compared to value stock earnings outlooks.
- Large-cap growth stocks with strong balance sheets should trade at a premium valuation in a recessionary environment.
- Growth-oriented tech subsectors are much better-positioned to adapt to an extended work-from-home environment.
- The financial sector is by far the largest value sector, and zero percent interest rates will likely make earnings growth extremely challenging for many financial sector stocks.
Buchbinder said value stocks simply aren’t positioned well for the current stage of the economic cycle and it’s still too early to be betting too heavily on value.
“As a stronger and more durable economic recovery becomes evident, we think value will have its day. At that point, we would expect better performance for small caps and the cyclical value stocks found in the financials and industrials sectors,” Buchbinder wrote.
Traders anticipating growth stocks will once again outperform value stocks in the near future can consider a pair trade in which they go long the Vanguard Growth ETF (NYSE: VUG) and short the Vanguard Value ETF (NYSE: VTV). Over the past decade, the Vanguard Growth ETF has more than doubled the return of the Vanguard Value ETF.
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