The end of the era of cheap money is redrawing the map of corporate America’s earnings — upending a decade of Wall Street wisdom about which stocks are cheap and which are tomorrow’s big winners. Tech giants FAANG members Amazon (AMZN.US ) and Netflix (NFLX.US ) swung into value stocks abruptly, while Exxon Mobil ( XOM.US) gets the coveted aura of a growth stock.
Gone are the days when tech giants were easily relegated to fast-growth companies and oil stocks were considered cheap, as all bets on the trajectory of the economy amid inflationary shocks have come to naught. Today, growth fund managers who have relied solely on buying superstar tech stars in a bull market are increasingly buying stocks traditionally viewed as value, and vice versa.
Index managers are far apart on how to classify companies like Amazon and Exxon Mobil as the line between the two most popular styles of investing in stocks blurs. That makes life harder for stock managers to rebalance their holdings.
Take Stephen Yiu, who made $1 billion betting on the tech boom in less than five years. These days, the manager of the £735m Blue Whale Growth Fund is trying to explain to clients why he sold all of Meta Platforms (META.US) and Google parent Alphabet (GOOG.US ). “We’re trying to tell people now that we’re not a tech fund and hopefully people will understand, but some of them still have this perception, like, ‘Why are you going into energy? It’s not tech,’” Yiu said.
To cover losses of 28% in 2022, the London-based investment house is now touting new options in traditional economy sectors such as energy and rail, which are often seen as value bets in times of low interest rates.
Disagreements over how to define investment styles, such as value and growth, are par for the course for both active and quantitative managers. However, the degree of divergence in the market right now is noteworthy — index classifications are also important considering that some $800 billion in cash is tracking these strategies in the exchange-traded fund (ETF) space alone.
During a decade of economic downturn and easy monetary policy, growth investing was viewed as a pure and simple bet on the tech sector, which has outpaced all other sectors in terms of share price and earnings expansion. However, momentum has faltered for software and internet companies in an environment of rising bond yields following the pandemic-fueled boom. Meanwhile, the supply shock from the war in Ukraine, combined with a recovery in global demand, has pushed commodity prices into something of a supercycle.
Right now, stock investors are having a hard time figuring out which stocks look cheap on their own and which will show continued strong earnings growth trends. Brian Frank, fund manager of the value fund Frank value Fund, said: “Before you could easily say that technology is a growth stock and energy is a value stock, but now the line between the two is a bit blurred, not as clear-cut as before.” Count tech company PayPal (PYPL.US ) among its top holdings. “It’s a mistake for value investors to ignore growth,” Frank said.
The growth and value index, run by S&P Dow Jones Indices, saw record volume during December’s annual correction, affecting nearly a third of its market value, said Hamish Preston, director of U.S. stock indices. Energy stocks, the only sector with positive earnings last year, jumped to 8 percent from 1.4 percent, boosted by a surge in stock prices and a wave of upward earnings revisions. In the value sector, tech’s weighting rose 6 percentage points to 16.8 percent as analysts lowered their forecasts as the sector was home to many of the market’s biggest losers last year.
For example, while Amazon is still included in the S&P Growth Index, its weight in the new index has been increased after first entering the value measure last December. The S&P style benchmark is tied to about $380 billion in assets by the end of 2021, according to the latest data available. There has been speculation that, if the trend holds, FTSE Russell may follow the S&P in its annual correction in June to reflect the industry’s reversal of fortune.
Currently, there is a huge discrepancy among index providers. Although Exxon was the fourth-largest growth sector in the S&P 500 as of Friday, it didn’t have the same performance in the Russell 1000. Likewise, in the value category, Amazon holds the top spot in the S&P but has no weight in the Russell.
Meanwhile, S&P puts Netflix in the value camp, while the Center for Research in Security Prices, which runs Vanguard’s largest value and growth ETFs, still puts the company in the growth sector.
It’s a muddled picture for investors looking to gauge how long the recovery in value stocks can last. According to the S&P, growth stocks are valued in the 40th percentile relative to value — which looks reasonable. That’s at the 82nd percentile, according to the Russell Index — still expensive. According to Citi strategist Scott Chronert, the gap between the two metrics is the widest in 20 years.
“Historically, the descriptions of the two styles (S&P and Russell) have not diverged much,” Citi analysts wrote in a note earlier this month. Therefore, when the Russell index is conducted mid-year When the annual adjustment is made, we may see similar changes.”
Weeks into 2023, the fortunes of tech stocks have reversed yet again, with tech stocks now leading the charge amid speculation that the Federal Reserve will raise interest rates more slowly amid signs of peaking inflation. The tech-heavy Nasdaq 100 is up nearly 8% this year, while the S&P 500 is up 4%. But no one can guarantee that the rise of technology or the decline of energy will last.
Catherine Yoshimoto, director of product management at FTSE Russell, part of LSEG, said: “We cannot predict what will happen with an upcoming correction. Having said that, our style index is constructed from the bottom up, which means we are not trying to target a specific industry configuration. This will be the result of each underlying company style variable.”