A renewed rotation out of growth stocks and into value names has more sinister implications for the overall market, historical records indicate. In a Monday note, Stifel strategist Barry Bannister wrote that investors may not be cautious enough as the market rotates out of large-cap growth stocks into their value counterparts. The strategist added that the rotation out of growth names has largely been seen through the broader tech sell-off, while the rebound in value stocks comprises cyclical names with some defensive tickers. “S & P 500 Growth leadership is struggling and Value is rebounding. Some interpret that as a sign of cyclical economic recovery, and it may be. But if this fade for Growth relative to Value accelerates and deepens, the history of ‘secular’ Value-led markets is one of a sharply declining P/E over time, weaker S & P 500 returns and ever greater shocks, often lasting for many years,” he wrote. Bannister added that he expects a lower price-to-earnings ratio will likely offset much of this year’s earnings per share. He expects that this will leave the S & P 500 at around the 7,000 level. “Circumstances change, but Growth-to-Value rotation outcomes for long duration P/E ratios are always the same,” he added. This growth-to-value rotation coincides with previous episodes, including in the early 2000s, marked by meaningful drawdowns in broader equity markets as leadership shifted away from growthier names.
