Investors often become bullish on stocks when interest rates start to trickle down. That was certainly the case, as markets were anticipating the start of the US Federal Reserve’s easing cycle, which began with last month’s deep interest rate cuts. The S&P 500 stock index is up about 24% since the beginning of the year and 40% over the past 12 months. Since so-called growth stocks are often capital-intensive, it is generally believed that lower borrowing costs are advantageous. Tech stocks and small-cap stocks tend to be classified as growth stocks, meaning they are expected to rise faster than the rest of the market. But other factors are now at play, and some believe that value stocks, which are generally considered undervalued, may be able to outperform in the current environment. As we weighed the pros and cons, CNBC Pro asked analysts and investors which they preferred. Value stocks and growth stocks. Economic Risk Adam Turnquist, chief technical strategist at LPL Financial, said that under the current economic climate, he expects value stocks to outperform growth stocks as the risk of an economic contraction begins to decline. . “History also suggests that value should outpace growth for at least six months after the first rate cut,” he said. However, he said growth stocks could outperform if the economy hits a “hard landing.” “Most growth indices focus on mega-cap names and quality factors,” Turnquist said. “Most of these companies have delivered impressive revenue growth, are low leverage, generate large amounts of free cash flow, have fortress balance sheets and wide moats, and are well positioned to thrive in times of uncertainty and when growth is scarce. But Savita Subramanian, head of U.S. equities and strategy at BofA Securities, urged investors to “focus on value.” “The Fed is cutting interest rates at a time when the earnings cycle is accelerating, which is unusual,” he said on CNBC’s “Closing Bell.” “We’re entering into a slowing environment. This time it’s different.” last month. “We’ve really seen[value]start to take effect and margins grow in tandem with it. Vahan Janjigian, chief investment officer at historically outperforming Greenwich Wealth Management, has been favoring value stocks for some time, making up the bulk of his portfolio. It is a value stock. He said value stocks have a history of outperforming growth stocks over the long term, but acknowledged that this hasn’t happened over the past 15 years or so due to the “unprecedented” zero interest rate regime. . “Even though the Fed is cutting rates again, the more important question is what will happen to the yield curve. If the curve normalizes (i.e. becomes more sloping), then values will increase. It should outpace the growth rate,” and short-term interest rates will be lower than long-term interest rates. Janjigian said he expects stock performance to normalize once interest rates and the yield curve normalize. “This marks the end of a long period of growth outpacing value,” he said. So far this year, the Vanguard Russell 1000 Value Index Fund ETF is up about 16%, and the Vanguard Growth Index Fund ETF is up about 22%. VTV VUG 1Y Mountain Value ETF vs. Growth ETF In a note last month, Barclays’ U.S. equity strategy noted that value stocks tend to outperform growth stocks after interest rate cuts, albeit inconsistently. Analysts led by Venu Krishna wrote: “In past non-recession rate cutting cycles, median value returns have exceeded growth returns immediately after the ‘first’ rate cut, but this has been inconsistent.” said. After three months, “growth outpaces performance and takes over more consistently, meaning a soft-landing trajectory could lead to further upward growth in the future,” they added. Risk and reward George Ball, chairman of the investment firm Saunders Morris, is also a market expert on team value. “For the foreseeable future, multiple value stocks are likely to appreciate more and are less risky than more expensive ‘glamour growth’ stocks,” Ball said. “As interest rates fall, the value sector is a double-edged sword, with greater profit potential and less downside risk.” But Barclays’ Krishna says both investment styles stand to benefit from falling interest rates. However, “in a non-recession scenario, there is likely to be greater upside potential for growth stocks.” He acknowledged there are risks to his argument, including the upcoming U.S. presidential election and further upside in S&P 500 returns, but said, “both have historically been good for value.”
