Growth to Value: From One Extreme to Another
August 6, 2024 | TIMELY PM UPDATES
For much of the past decade large-cap growth stocks, fueled by technology companies, have reigned supreme. For the most part, this performance has been justified by the truly astounding business results of the dominant technology companies. For example, Microsoft, one of the largest companies in the world, nearly doubled its revenues from 2018 to 2023. In comparison, the total revenue of all the companies in the S&P 500 Index grew by a little over 36% during the same period—and that number would be much lower if you excluded the dominant technology companies!
However, as one would expect, these remarkable business results have led to premium market valuations, and investors do tend to become overly exuberant from time to time. The past 18 months are increasingly looking like a period of such exuberance. On the back of investor confidence that the Federal Reserve’s rate hikes were over, and the release of OpenAI’s ChatGPT 3, large-cap growth stocks kicked off a historic period of outperformance at the beginning of 2023. By the end of the second quarter of 2024:
- The Russell 1000 Growth Index had risen ~72% vs ~19% for the Russell 1000 Value Index.
- The S&P 500 had reached its highest level of concentration in at least the past 30 years, with the top 10 stocks making up over 35% of the index[1].
- Nvidia had gained nearly $3 trillion in market value, briefly becoming the largest company in the world[2], while CEO Jenson Huang had assumed a pseudo-celebrity status[3].
- Investors had coined the largest seven stocks in the S&P 500 as the “Magnificent Seven” and there didn’t seem to be a point in owning the other +3000 publicly traded stocks in the U.S.
Source: Bloomberg, data from 12/31/1995 through 6/30/2024. Growth and value are represented by the Russell 1000 Growth and Value Indices. The Russell 1000 Value Index includes those Russell 1000 companies with relatively lower price-to-book ratios, lower I/B/E/S forecast medium term (2-year) growth and lower sales per share historical growth (5-years). The Russell 1000 Growth Index includes those Russell 1000 companies with relatively higher price-to-book ratios, higher I/B/E/S forecast medium term (2 year) growth and higher sales per share historical growth (5-years).
Perhaps it’s a reflection of how everything seems to move faster in our increasingly digital world, but now, just one month later, the narrative has shifted substantially. Following the June CPI release, money flowed out of the large-cap technology stocks and into the rest of the market. As seen in the chart below, over the next two weeks, small-cap value stocks outperformed large-cap growth stocks by over 15%. This was the third largest two-week outperformance going back to the creation of the S&P 600 Value Index in 1997.
Source: Bloomberg. Data from 7/31/1997 to 7/31/2024. The S&P SmallCap 600® Value measures constituents from the S&P SmallCap 600 that are classified as value stocks based on three factors: the ratios of book value, earnings and sales to price. The S&P 500® Growth measures constituents from the S&P 500 that are classified as growth stocks based on three factors: sales growth, the ratio of earnings change to price, and momentum.
Over that same two-week period, the increased concentration of the S&P 500 Index came back to bite passive investors. The S&P 500 Index fell 3.6% while the average stock actually rose[4]. Put differently, market breadth improved as money flowed from the largest stocks into the rest of the market. Improved breadth may indicate a healthier market environment, as gains are not concentrated in a few large names but are spread across a wider array of companies. We believe that this rotation from growth to value is likely to continue in one way or another and that the best opportunities in the market will be found outside of the largest companies.
The recent rotation from large cap growth to small cap value stocks may also mark a significant shift in market dynamics. We believe this transition, coupled with increased market breadth, presents a promising landscape for investors seeking diversified opportunities in the evolving market environment. Harry Markowitz, the inventor of modern portfolio theory is reported to have said “diversification is the only free lunch,” however, it’s been a long time since diversification has paid off for U.S. investors. Perhaps we’re finally entering a market environment where the “free lunch” of diversification is back.
Are your portfolios set up to handle, or even take advantage of, a market shift like this one?
No matter which way the market goes, there are asset managers (like us) that specialize in opportunistic investing designed for market environments like this one. They can:
- Nimbly shift among diverse asset classes without making large, long-term bets one way or the other.
- Capitalize on discrete opportunities nearly anywhere in the global investment universe.
- Make marginal asset allocation decisions for investors as markets continue to shift.
[1] https://www.apolloacademy.com/extreme-concentration-in-the-sp-500/. As of June 9th, 2024.
[2] https://fortune.com/2024/06/21/nvidia-market-cap-world-most-valuable-company-nvda-stock-selloff/. Nvidia was the largest company in the world from June 19th, 2024 to June 20th, 2024. On June 21st, it was no longer the largest company.
[3] https://www.theverge.com/2024/6/4/24166297/nvidia-jensen-huang-computex-signing
[4] The S&P 500 Equal Weight Index rose 1.2%.
Disclosure:
Copyright © 2024 Beaumont Capital Management LLC. All rights reserved. All materials appearing in this commentary are protected by copyright as a collective work or compilation under U.S. copyright laws and are the property of Beaumont Capital Management. You may not copy, reproduce, publish, use, create derivative works, transmit, sell or in any way exploit any content, in whole or in part, in this commentary without express permission from Beaumont Capital Management.
Certain information contained herein constitutes “forward-looking statements,” which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “project,” “estimate,” “intend,” “continue,” or “believe,” or the negatives thereof or other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events, results or actual performance may differ materially from those reflected or contemplated in such forward-looking statements. Nothing contained herein may be relied upon as a guarantee, promise, assurance or a representation as to the future.
This material is provided for informational purposes only and does not in any sense constitute a solicitation or offer for the purchase or sale of a specific security or other investment options, nor does it constitute investment advice for any person. The material may contain forward or backward-looking statements regarding intent, beliefs regarding current or past expectations. The views expressed are also subject to change based on market and other conditions. The information presented in this report is based on data obtained from third party sources. Although it is believed to be accurate, no representation or warranty is made as to its accuracy or completeness.
The charts and infographics contained in this blog are typically based on data obtained from third parties and are believed to be accurate. The commentary included is the opinion of the author and subject to change at any time. Any reference to specific securities or investments are for illustrative purposes only and are not intended as investment advice nor are they a recommendation to take any action. Individual securities mentioned may be held in client accounts. Past performance is no guarantee of future results.
As with all investments, there are associated inherent risks including loss of principal. Stock markets, especially foreign markets, are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments. Sector and factor investments concentrate in a particular industry or investment attribute, and the investments’ performance could depend heavily on the performance of that industry or attribute and be more volatile than the performance of less concentrated investment options and the market as a whole. Securities of companies with smaller market capitalizations tend to be more volatile and less liquid than larger company stocks. Foreign markets, particularly emerging markets, can be more volatile than U.S. markets due to increased political, regulatory, social or economic uncertainties. Fixed Income investments have exposure to credit, interest rate, market, and inflation risk. Diversification does not ensure a profit or guarantee against a loss.
The federal funds rate is the interest rate at which banks lend money to each other overnight. A treasury yield is the interest rate the U.S. government pays on its debt, and the annual return that investors can expect from holding a U.S. government security.
Please contact your BCM Regional Consultant for more information or to address any questions that you may have.
Beaumont Capital Management LLC, 125 Newbury St. 4th Floor, Boston, MA 02116 (844-401-7699)