Barclays Capital equity analysts led by Keith Parker in New York warned investors about an over-reliance on growth stocks this week. He says they’ve reached their limits. Consider value stocks instead.
Solid corporate earnings have pushed growth equity higher than value and dividend paying stocks this year, with the outperformance largely thanks to the re-rating of growth equity by investment firms recommending overweights and buys. “Growth stocks are now trading at their highest premium to value stocks since early 2016,” Parker says.
The top 10 stocks account for 47% of the S&P rally, the highest by far since 2003. For Barclays, it is time for the divergence between growth and value to turn into a “catch up” trade. The reallocation since March into tech funds (up $4 billion) and out of other sector funds (down $5 billion) has helped fuel the rotation, just as growth equity mutual funds raised exposure above benchmark, with tech exposure increasing the most.
For stocks to continue to rally, other factors must come into play – namely value. The legislative trifecta of tax cuts, infrastructure spending, and healthcare reform has worn itself out. House Republican leadership is sitting on their hands regarding tax cuts, with many top and former top Republicans like John Boehner basically calling tax reform a pipe dream for this year. Cuts to the corporate tax rate was another reason to be bullish on the Dow and S&P.
Barclays is still recommending positioning for a corporate tax cut, but thinks investors need to add value exposure now.
“The prospect of tax language from Congress in June combined with Fed and ECB meetings are key catalysts for the rotations,” Parker and his team wrote in a note to clients. He reiterated the bank’s preference for capital goods and transports over semi-conductors and tech hardware.
“We would use the performance divergence to add financials exposure and reduce discretionary,” he says. “Outside of the growth versus value spectrum, we still prefer energy over materials, healthcare over staples, and telecom.”