Investors are typically more aggressive during periods of heightened volatility and would chase popular growth stocks. Since growth stocks show high multiples, investors may expect that the companies will sustain a high growth rate. In contrast, traders may feel that firms with low multiples would continue to experience tepid growth. However, the value style came into focus this year after a bout of heightened market volatility and lingering global uncertainty pushed investors away from riskier high-growth stocks.
The growth style, though, may be gaining momentum as investors turned to upbeat economic and earnings data, causing many to adopt a more risk-on attitude.
According to Thomson Reuters data, of the 70 S&P 500 companies reported as of Wednesday, 67% companies beat estimates. The numbers reveal an earnings bounce that many were waiting for. The results so far reflect an economy that is still steadily expanding and companies are rebounding.
Moreover, U.S. economic data has been positive over recent weeks, bolstering investment confidence. For example, the number of those filing for unemployment benefits dipped to a three-month low last week, signalling further improvements in the labor market.
Looking ahead, investors will want to keep an eye on the Federal Open Market Committee meeting next week. Recent Fed funds futures rates showed rising options traders’ expectation for an interest rate hike. Weighing on the value outlook, the Federal Reserve may still hike interest rates – energy companies, commodity producers and other firms dependent on emerging markets are vulnerable to losses if rates rise.
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Full disclosure: Tom Lydon’s clients own shares of SPY.