Goldman Sachs said that tightening financial conditions and the increased possibility of an excessive economic slowdown and a recession are one reason U.S. stock investors choose to invest steadily.
“In the current worrisome stock market investment environment, we believe stability is more attractive than growth or value,” strategist David Kostin and his team wrote in a note Sunday. In times of tightening, stocks with stable growth and low share price volatility typically outperform and are currently undervalued.”
Sectors dominated by growth stocks include information technology (XLK.US), consumer discretionary (XLY.US) and communications services (XLC.US). Sectors dominated by value stocks include Financials (XLF.US), Industrials (XLI.US), Energy (XLE.US) and Consumer Staples (XLP.US).
Growth and value trades will move sideways for the rest of 2022, Kostin said.
He added: “For the stock market to return to the growth sector’s sustained outperformance, it will require investors to maintain confidence that the economy will slow but not recession, and that inflation will soften enough to reduce the need for further sharp Fed rate hikes. Results are possible, but equity investors doubt the Fed can achieve these goals without triggering a U.S. recession in 2023. Growth stocks will struggle to outperform until uncertainty is reduced.”
The woes of growth and value investing have raised concerns about the performance of the broader market. “Over the past three months, the correlation between growth and value investing in the S&P 500 has been the strongest in the 20 years since the tech bubble burst in 2001,” Kostin said.
This correlation may be explained by the heavy weighting of growth stocks in the S&P 500, the popularity of growth stocks among many investors right now, and the fact that Fed policy and the interest rate environment are driving the growth/value transition and the stock market importance in terms of overall return. “
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