(Bloomberg Opinion) — Last year’s strong outperformance in the cheapest stocks, so-called value stocks, is likely to reverse soon as the economic recovery slows, say strategists at JPMorgan Chase & Co.
Bloomberg’s Most Read
A market darling in 2022, value trading is starting to lose its luster. The next step for investors in the next month or two could be “completely underweight value versus growth,” the team led by Mislav Matejka wrote in a note.
“Our core view is that in the second half, the market will return to trading slump, but even if the opposite scenario gains strength, the stock might not be the best place to be,” he wrote on Monday.
Value stocks have begun to stall against their growth peers recently, after outperforming them last year by the most since the 2000 dot-com bubble. While cheaper stocks got a boost from rising yields of bonds and inflation, investors are starting to price in more aggressive policy. which may reduce support for trade as yields peak.
Value stocks such as financials and commodities rose from the market low in September while, at the same time, rising rates weighed on growth stocks as highly valued sectors such as technology suffered a reduction in profits. Initially, the trade was also supported by better than expected macro data.
But now, Matejka says, the momentum in economic activity is likely peaking and could reverse soon, while flattening inflation expectations suggest that the value factor should not fare as well relative to growth ahead of time. from now on.
Strategists currently maintain a neutral stance on value versus growth. While they view the cheapest stocks as more attractive than their growth peers over a two- to three-year horizon, they expect the group to weaken this year.
“A better relative tech performance than last year would ensure that the value factor is not a winner this year,” Matejka wrote.
But for the BlackRock Investment Institute, value stocks may resume their climb as major central banks hold rates higher for longer after growth stocks led the US rally so far this year. Strategists led by Wei Li argue that higher borrowing costs reduce the value of future cash flows, weighing more heavily on growth stocks.
For Li, stubbornly high inflation “is likely to lead investors to demand more compensation for holding long-term government bonds, which will boost yields,” he wrote in a note to clients on Monday. “Value tends to outperform when the yield curve slopes.”
–With assistance from Kit Rees and Jessica Menton.
(Updates the last two charts with the BlackRock view)
Bloomberg Businessweek Most Read
©2023 Bloomberg L.P.