Coming Off Equity Bottom, Growth Continues to Beat Value

This week’s big number? 14.1% — the year-to-date total return spread between growth and value stocks, as represented by the S&P 500 Growth Total Return Index and the S&P 500 Value Total Return Index.

Growth has been in favor all year, which is consistent with the market anticipating slower economic growth in the future. Why is that? Because heading into a downturn, investors typically bid up the price of growth stocks precisely because they’re the only ones that actually ARE growing. Simply put: when growth is scarce, it commands a premium. 

But the interesting thing now is, even coming off the equity bottom we saw a month ago, growth has continued to beat value. This flies in the face of what historically happens during a recovery phase. Typically as risks abate, investors begin to realize that there are lots of good “values” to be had, driving the performance of value stocks higher.

Also notable is that at 14.1%, the spread is the highest over this duration that we’ve seen since the Global Financial Crisis. With the biggest week of earnings coming up next week (50% of the S&P 500 Index by market cap reports), keeping an eye on how these styles perform should give us a better sense of how durable the current equity market recovery is, and also what type of investment landscape investors believe will emerge coming out of the shutdown. And that will largely depend on whether earnings reports offer more information about the future outlook for companies. If we don’t get an outlook, growth stocks will likely continue to shine.  

It also depends on what a reopening, or re-start of the economy, looks like. If we reopen, but end up having to go in and out of lockdown, that could depress confidence. And because growth companies are generally higher quality (i.e., better balance sheets, less economically sensitive revenue streams), if we do see that kind of start-stop situation, growth will likely continue to outperform.