Value or growth? Which one of those themes is the best bet over the longer term as the economy deals with the delta-variant phase of the recovery from the worst pandemic in generations?
In short, the answer to that question is complicated, notesd Lori Calvasina, head of U.S. equity trading strategy at RBC Capital Markets.
‘This is a more complicated equity market than we saw back in January, that requires more nuance.’
— Lori Calvasina, head of U.S. equity trading strategy, RBC Capital Markets
Value-oriented stocks — shares of companies viewed as significantly undervalued based on their share price relative to metrics like earnings, revenue or book value — have stumbled in the past three months after enjoying a renaissance, as investors sought to shift out of growth oriented investments that had benefited from lockdowns and mobility restrictions imposed to combat the COVID-19 pandemic.
Value, as measured by the iShares S&P 500 Value ETF
has declined 0.4% over the past three months, compared with growth stocks, which have risen 10%, as measured by the iShares S&P 500 Growth ETF
Those rooting for a recovery in value have been waiting more than a decade, but it isn’t clear that the economic rebound will yield a sustained and longer-term shift in the trend, Calvasina wrote. And that includes the resurgence of the delta variant of the coronavirus that causes COVID-19, which may be contributing to a downshift in the earnings outlook for some companies.
That said, the RBC analyst said that a number of recent challenges are complicating matters but still may give way to good performance for value (or growth) depending on an investors’ timetable.
“Which part of the style trade an investor should lean into right now really comes down to time horizon, in our view,” she said.
“We believe style leadership will remain choppy through 2022, and that we’ll see several leadership shifts between growth and value between now and late next year,” the analyst wrote.
RBC’s research note highlights the uncertainty about the prospects for style investments in the aftermath of the deadly viral outbreak and fitful rebound by private businesses and governments.
In the near term, Calvasina expects that another burst of value leadership could be at hand if the earnings outlook improves for companies considered to fit the value label, and if flows into value-pegged funds also pick up steam.
RBC appears to lean toward a renewed run for value, especially if the economic rebound continues.
“Once those clouds clear, the stage seems set for another burst of value leadership in the intermediate term…That’s a long way of saying that a hot economic recovery into next year is supportive of further outperformance by value and cyclicals,” wrote Calvasina.
But don’t get too excited about value’s longer-term outlook.
“But even though we get very excited about the idea of another big outperformance trade in value, we also worry that it may very well end up being value’s last hurrah,” the researcher wrote.
Calvasina cautioned that the economy is close to peak economic growth that may revert closer to statistical averages in the coming years, as well as rate increases by the Federal Reserve, which could further cool the market and economy.
So, what should an investor’s play book look like in this stretch, with the S&P 500
the Dow Jones Industrial Average
and the Nasdaq Composite Index
trading near records.
RBC says that it “makes sense to dial down value/cyclical exposure and make our S&P 500 sector recommendations more balanced between value/cyclical and growth.”
“At the same time, we are upgrading technology (which we consider to be the most appealing growth oriented sector) to overweight from market weight,” Calvasina wrote.