Beaten-down growth stocks turn alluring for investors

Investors bet they will shine as Fed fights to cool down US economy

NEW YORK:

Some investors are looking for bargains in beaten-down growth and tech stocks, betting they will shine as the Federal Reserve fights to slow the US economy and tame redhot inflation.

Growth stocks - which have trounced their valued-focused peers over the last decade - have borne the brunt of the Federal Reserve’s hawkish turn this year, with the Russell 1000 Growth index down more than 11% year-to-date, compared to a more-than 5% loss for the benchmark S&P 500 index.

By contrast, value stocks - often defined as shares of economically sensitive companies trading at a discount to their total worth - are broadly flat on the year.

Underpinning those moves is the perception that the Fed’s fight against inflation will keep interest rates climbing, eroding the future cash flows that growth stocks are heavily valued on.

Value stocks, meanwhile, have found support from a strong economy and surging commodity prices.

That dynamic could change if the Fed’s tightening monetary policy slows the economy. That would boost the appeal of growth names for some investors who believe their profits rely less on broader economic strength.

The Fed raised interest rates by 25 basis points last month and has hinted at meatier increases ahead.

Expectations of an aggressive Fed briefly turned the spread between yields on two and 10- year treasuries negative last week, a phenomenon that is often seen as an indication of worries about economic growth.

Recessions have followed six of the last seven yield curve inversions since 1978, according to data from Truist Advisory Services.

“If these recession fears grow, then you are going to have a big shift away from value stocks,” said Esty Dwek, Chief Investment Officer at FlowBank, who has been increasing her stake in technology stocks.

“Sustainable earnings growth … will become more important again.”

Growth stocks have tended to outperform in the six months following yield curve inversions, with the Russell 1000 Growth Index rising by an average of 6.4% during such periods since 1978, compared to a 4.4 % gain for value stocks, data from CFRA showed.

Growth stocks have fallen by an average of 0.6% during recessions, while value stocks have fallen by an average 6.8%, according to CFRA data.

The Russell 1000 Growth Index is up 320% over the last 10 years, compared to a 145% rise for its value-focused counterpart.

Earnings season kicks off next week, giving investors a closer look at how companies have fared at a time of heightened geopolitical uncertainty and rising commodity prices.

Also on tap is the latest US consumer prices report, due out on Tuesday.

The S&P 500 is on track to close down 1% this week, as worries over a more aggressive Fed slow a rally that saw the index pare its year-todate losses last month.

Overall, investors have sent a net $4.2 billion to the Invesco QQQ Trust - which tracks the growth-heavy Nasdaq 100 Index - over the last three weeks, the fund’s longest streak of positive inflows since January, Lipper data showed.