Growth stocks have taken the lead in the equity market’s recent rebound.
The Russell 1000 Growth index has soared 22% since June 16, while the Russell 1000 Value index has gained a more muted 12%.
The reversal in bond yields downward helped spark the move. Lower yields help growth stocks because the promise of their future earnings stream looks better than the falling income stream for risk-free assets, such as Treasury securities.
And it’s not just low-quality growth stocks that are rising, JPMorgan strategists write in a commentary. “Out of the basket of growth opportunities that we identified, a number are up 50% or more over the past two to months,” they said.
Shout-Outs for Adyen, Avino, ASML
“And these are stocks with meaningful-market caps, … definitely not fringe plays.”
In addition ASML (ASML) , the Dutch photolithography supplier for semiconductors, has gained about 35% from its July 6 low.
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“So, is the rebound [for growth stocks] getting overdone and should one go back into value?” the strategists ask rhetorically. “Not yet,” they answer.
“The key is the direction of long yields, where the peaking at midyear was one of the big catalysts for the rebound in growth [stocks],” the analysts said. The 10-year Treasury yield peaked at 3.48% June 14 and has since slid to 2.78% as of Aug. 15.
Yields should remain subdued until economic activity hits bottom, sometime in the fourth quarter, they said.
For value stocks to regain the lead over growth, the Federal Reserve would have to pivot away from raising interest rates, and the yield curve would have to steepen, the strategists said.
A return to superiority for value stocks wouldn’t necessarily mean declines for the overall stock market, the strategists said.
As economic activity potentially hits its trough, “value could lead again, in a continued up market,” they said. The value factor and market direction have historically been positively correlated, they said.
In July, the strategists called for a “tactical rebound” in growth stocks, particularly the technology sector. “We believed this would lend support to the broad market levels,” they said.
“We continue to think the rebound in growth is only tactical, but it likely has further to go, perhaps even until year-end.”